Call Sellers Take Premium in Property-Casualty Insurers

Following Tuesday's gonzo rally, it seemed in some way inevitable that today's 50-basis-point rate cut would be a bit of a flameout. Stocks by and large have surrendered early gains. One exception appears to be insurers, which rallied sharply after the rate cut and amid a difficult earnings season.

A Reuters report out Tuesday held that property-casualty insurers, including Travelers (TRV - commentary - Cramer's Take) and Chubb (CB - commentary - Cramer's Take) have insisted that they will survive without the need of federal bailout assistance, and this -- coupled with the rate cut -- may have engendered a surge of optimism that resulted in sharp gains for shares and a rise in call-side premiums.

Shares in Ace Ltd (ACE - commentary - Cramer's Take) rallied 10.5% to $54.57, and implied volatility on its options dropped 17%, following its earnings report. An increase in options trading volume to nine times the normal level showed traders positioning freshly in December 60 calls, with 99% of the traffic at this strike selling to the bid, suggesting buy-write strategies may be in force here.

Options in Travelers Insurance also showed unusual volume of seven times the normal level, as shares were falling 4% to $40.33. Here again, option traders eyed out-of-the-money calls as a means of generating income, selling December 45 calls for about $2.20 apiece as the value of these positions rose more than one-third, thanks to the share-price rally.

While a U.S. rate cut did little to inspire much in the way of directional trading in U.S. shares, similar restrictive action by the People's Bank of China seems to have elicited an unusual level of interest in the iShares MSCI Taiwan Index (EWT - commentary - Cramer's Take).

With shares in the fund down 4% at $7.90 heading into the final hour of trading, an increase in options trading to more than nine times the normal level showed up in what appeared to be a 4,500-lot straddle that was sold in the March contract for the princely sum of $2.25 (...more than a quarter of the fund's current price). The trader in this instance is looking for stabilization in the volatility of the stock price, but little relative change from current depressed levels by March 20, when the position expires.

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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.