I know should be using a football analogy today, but the day's action felt more like a shallow pop fly where the bears got some wood on the ball, but the contact was weak. Maybe some velocity is coming off the buying, but it still enough to stymie the bears and retire the side without doing any real damage. The VIX did rise 5% to 10.62, but remains near historic lows, and some of today's increase should be attributed to the "Monday effect" in which the time decay of the weekend gets fully priced on Friday's close, leaving room for a lift today.
Leading the most active option list was Cisco (CSCO - commentary - Cramer's Take) as interest continues to build ahead of tomorrow's earning's report. The preference still seems to be for call options with overall volume of some 190,000 against 120,000 puts. The most active strike was the Feb $27.50 trading another 50,000 contracts today and in the strike now at 77,000 contracts. The Feb. $27.50 put traded 44,000 contracts, and that at-the-money straddle is $1.90 which means the options are currently pricing in about a 4%, or $1.10, price move.
But it was mergers, proposed mergers and rumors of mergers that generated the most activity as Triad Hospitals (TRI - commentary - Cramer's Take), Mills Corp (MLS - commentary - Cramer's Take) and Nabors (NBR - commentary - Cramer's Take) all saw above-average option activity, but a decline in implied volatility.
In Nabors case, the drop in IV was accompanied by a decline in price as takeover speculation subsided. For Triad and Mills, the buyout talks were confirmed, and with price ranges set, out-of-the-money options lost much of their premium.
Active implied volatility gainers were led by Sallie Mae (SLM - commentary - Cramer's Take), whose IV rose 24% as the stock fell 6% on news that the new federal budget included a 50-basis-point cut in student loan subsidies. Also higher was volatility for Emerson Electric (EMR - commentary - Cramer's Take), whose IV increased 14% ahead of tomorrow's earnings' report.
P.S. Will you be there when Cramer makes his next move?
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Steven Smith Blog REITS Are Still Rocking 2/5/2007 9:19 AM EST Also, take a look at potential setups for Humana and Royal Caribbean.
Steven Smith Blog Another Notch in Bulls' Belt 2/2/2007 4:59 PM EST Investors enjoyed a good market day, and the S&P is enjoying some historic statistics.
Steven Smith Blog Cisco and Nike Positioned to Go Higher 2/2/2007 11:13 AM EST Call volume on Cisco is way up, while Nike's chart is starting to look good.
Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.To read more of Steve Smith's options ideas take a free trial to TheStreet.com Options Alerts.
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