SPDR Metals and Mining ETF (XME) – Option traders appear to embrace the trope of demand erosion today, with volumes and volatilities elevated in a number of leading miners and ETF’s. Options volume in the SPDR Metals and Mining ETF showed an increase to 9 times the normal level as shares pulled back 5% to $72.29. Fresh volume occurred in August 67 puts, which traded 39,400 times to the middle of the market at $1.05 – making the directionality of the trade difficult to ascertain. A couple of scenarios may be going on here – a trader may be baldly positioning for a bold correction in the metals and mining space over the next 11 days, given that the fund is already down some 22% since June 30. Or he or she may be taking that $1.05 premium as a credit, playing on the 75% probability currently priced into the options market that the ETF won’t collapse below the $67 level by August 15. A share price decline of that magnitude would put the fund at levels not visited since March 17.

Bovespa (EWZ) – Mining sector doldrums sent Brazil’s Bovespaindex to a third consecutive day of losses, while during U.S. trading, shares in the iShares MSCI Brazil fund declined 4% to $75.88 as we showed puts outtrade calls by more than 5 to 1. We should note here the action – although it involves puts - may not be bearishly inclined. A 3,000-lot put spread was entered this morning between strikes 75 and 80 in the front month, and both sides, it seems, traded to the middle of the market. A buyer of the put spread would have paid a $2.35 premium in the expectation of shares trading at least as low as $77.65 but not below 75 by the expiration of the contract – this would roughly cover the magnitude of the move seen since Friday afternoon, when the fund closed at $79.08. Conversely, a short seller of the put spread would take that $2.35 as a credit, betting on a pull back above the $80 level over the next two weeks.

Market Vectors Gold Miners (GDX) – Shares in the Market Vectors Gold Miners equity fund pulled back 3% to $41.08 as options volume of 16,500 qualified the precious metals-indexed fund for our scan of early market movers by options volume. However, a glut of opening positions in the front month contract showed a couple of clear tendencies, both of which showed signs of volatility-bearishness. One trader sold a 1,500-lot strangle at the August 42/43 combination this morning for a premium of $2.45, predicting rangebound movement between those strikes for the duration of the August contract. We also noted heavy volume in August 41 calls, which traded to the middle of the market for $2.10, and did not appear related to the strangle – a buyer of this position would look for the price of the fund to bottom out at current levels and recover upward over the next couple of weeks.

Marvel Entertainment (MVL) – With some market observers perhaps drily hoping for the intercession of a superhero to scoop the market from its Lex Luthor-like sentiment vise, some option traders are doing the next best thing by positioning in contracts for Marvel Entertainment. Shares in the company, whose comic-book icons have propelled the company to powerhouse status owing to their successes in film franchising and merchandising - trading flat at $35.39. With the company due to report earnings tomorrow, it’s not surprising to see an incongruity in the implied volatility reading (50.5%) versus the historic reading (39.7%), as the options market prices in an added premium ahead of the numbers. One trader appears to have taken advantage of a perceived mispricing – while also positioning for upside in the company – by using a 3,000-lot calendar call spread. Here the trader appears to have sold 3,000 deep-in-the-money January 30 calls for $7.53 and bought an equal number of December 45 calls for $1.03. In this case the trader is betting that the value and implied volatility of those December 45 calls will increase rapidly (which they will do if shares rise dramatically). He or she could have funded this purchase with the sale of the January 30 calls and taken a $6.50 credit in hopes of closing out the position profitably before being exercised on the January 30 calls. Option traders are currently putting the odds of a Marvel break of $45 by December 19 at only about 1-in-5.

Cypress Bioscience (CYPB) – Shares in drug company Cypress Bioscience declined 5.7% to $8.23, which puts the share price about $2 above its 52-week low set back on May 9. The company’s VP of corporate development is due to speak at a clinical and regulatory conference for small and mid-cap companies today, while Cypress earnings are due out on Friday. Cypress tends not to be heavily targeted by options traders, which means today’s volume of just 4,000 lots represents an increase to 8 times the normal level. This appeared in out-of-the-money puts in the December contract, where it looks like traders opened positions at the 2.50 and 5.00 puts – sending overall put volume to its heaviest since March 20 and raising our eyebrows at what these out-of-the-money strikes might imply for its share price prospects going forward. The options market may have some intimation of this, given that implied volatility at 83.2% rates well above the historic reading of 57.0% - suggesting nearly 45% added potential price risk being factored into its options over the next 30 days.

Motorola (MOT) – Motorola shares rose another 10% to $9.70, one day after surprising the market with less-dire-than-expected earnings. But will the good times last? About one-third of the 63,000-strong lots already trading today involves bets on whether Motorola will surpass the $10 mark, and while August call activity showed traders readily buying into the long side of that bet, earlier today we observed heavy selling action in the same strike in September at just 36 cents apiece.

Sotheby’s (BID) - Shares in the beaten-down auction house are trading 2% higher at $28.35 on the eve of earnings, and the 69.8% implied volatility reading (against 47.6% historic) attests to a high level of anticipation ahead of those quarterly numbers. The increase in option trading volume to 1.8 times the normal level shows traders positioning readily in August 30 calls – we’ll be keeping an eye on the options setup in this ticker ahead of numbers, given its habit of leaving pre-earnings call-buyers holding the bag.

• Options Trader: Friday Outlook  »
• This Rally Is Over, and Here’s Why  »
• The $64 Trillion Question: What's the Dollar Really Worth?  »
• September: Off to a Rough Start?  »
• Housing Prices: Bottom or Temporary Bear Break?  »

Andrew Wilkinson

• Bio & more articles
• Visit author's site