Option Traders Playing Spreads in Financials

Given yesterday's spectacular gains in the implied volatility of bank and brokerage options, today's slight retracement in implied volatility has a whiff of inevitability to it. But levels are still high enough that it still pays for traders to opt for spreads rather than naked call or put positions in leading financials.

For evidence of that, consider JPMorgan Chase (JPM - commentary - Cramer's Take), which read 5.6% higher at $27.65 heading into the close. Implied volatility in all JPMorgan options has returned to something of an even keel, down some 22% from its interim high on Nov. 20, but at 110.5% (vs. a historic reading of 106% on the stock), there's still a slight risk premium being added to its options.

Send in the spreads -- traders are doing exactly this in the March contract, where afternoon action included a 5,000-lot call spread between strikes 30 and 40. While this was an opening position, both ends traded to the middle of the market, so we cannot confirm the direction of the trade. A JPMorgan bull would have paid a $2.80 premium, looking for an upside move of at least 14% by mid-March, and with the strategy paying out as much as 2.5 times the money at risk if the direction and range have been accurately forecasted by this trader, it's conceivable that this strategy traded to the long side. Alternatively, this trader could have taken the $2.80 spread as a credit, spurred on by today's higher call-side premiums, and capping any upside expectations well into the spring of 2009.

General Electric's (GE - commentary - Cramer's Take) implied volatility came off a merciful 20% on today's impressive share-price upside, and that brought out the call traders. With shares up 13.5% to $17.59 today, most active today were December $17.50 calls, where traders opened fresh positions on both the long and short side. Interest in the at-the-money call strike extended into the December contract, where again the volume seemed two-way. Lower volatility could be ushering in long call-side positions today, while the higher call-side premiums relative to puts (and broader skepticism about GE's ability to maintain current share price levels) would encourage sellers of these same positions.

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At the time of publication, Darst had no positions in the stocks mentioned.

Rebecca Engmann Darst is the Portfolio Manager for TheStreet.com?s Options Alerts Portfolio newsletter and an equity options analyst for RealMoney Each Thursday at 6:30 a.m. EST, she delivers the early-morning lowdown on option volume and sector trends on CNBC's "Squawk Box." Prior to her work in the equity options market, she spent seven years in Scandinavia as a Copenhagen-based chief reporter for a European Commission news service, correspondent for Spanish daily El Mundo and Radio Netherlands, followed by stints at Nordea Bank and Saxo Bank.