News of a tentative deal between the UAW and automaker General Motors (GM) could send options traders seeking vindication in the October calls, after premiums plummeted in the front-month call strikes yesterday. Tuesday’s option action showed the October 37.50 calls selling off at prices around $0.95. Bear in mind that a day earlier these calls were selling for $1.75, but premiums dropped off sharply once union workers made good on a warning to stage a nationwide labor stoppage at the leading automaker. GM shares are up 6.3% in the premarket.
Our futures arbitrage indicators are showing a higher opening for US shares, with contracts on the S&P, Nasdaq and Dow Jones Industrial Average all trading at premiums to fair value. Reaction to data on durable goods orders and earnings from Bed Bath & Beyond (BBBY) will also be keenly followed. Sober comments from leading retailers with front-line exposure to the consumer spending and housing sphere, Target and (more significantly) Lowe’s showed investors bracing for continued volatility through the rest of the autumn, but some cautious call-side positioning in January.
Despite a rising sense of bleak pragmatism toward the retail outlook and continued blighted data, stocks pulled off a flat close yesterday and volatility, as measured in the VIX index, continued its retraction yesterday, pulling back 4% to 18.60. Option traders appeared to playing on the probability of no more than a minor swelling in volatility for the remainder of October, hemmed in bets by using call spreads at the October 20 and 25 strikes. Some 15,000 lots traded at each of those strikes yesterday. Buying on the put side appeared localized at the October 20 strike. A look at the November puts showed similar spread strategies in play at strikes 15 and 17.
Recapping action from yesterday, we observed heavy traffic in options of Echostar Communications (DISH), the parent company behind the “DISH Network” –arch-competitor of DirecTV - following news of a possible spinoff of its technology and infrastructure business. Yesterday’s active volume of 23,000 lots equaled about 15% of Echostar’s total open interest, and was nearly 4 times the average volume, as shares tacked on gains of 6.8% to $43.81. More than twice as many calls traded as puts, with action in the October 37.50 calls and buying in the November 40 calls at prices of around $4.30. Traders have nudged the price positioning up a notch in the December calls, with heavy buying at strikes 45 and 47.50. Implied volatility was also elevated, up 15% to 33.9%.
