To quote Woody Allen's Crimes and Misdemeanors, in which the blow-hard character played by Alan Alda is asked what the meaning of humor, says, "If it bends it's funny, if it breaks, it's tragedy." Well, so far the market is merely bending and refuses to break.
But take solace in the fact that Alda follows up his theory by saying "Tragedy plus time equals comedy." So even if we do break, we at least can count on having a few good laughs at some later point this year.
What this means is that all the angst expressed by the talking heads over the past few months will be put in perspective, and we'll most likely find that like most other crises, the market managed to works its way through what is currently a tragic situation on many fronts.
That includes homeowners who find themselves in foreclosure and underwater, that their mortgages are now higher than the value of their homes, shareholders who have seen billions of dollars evaporate from both their personal funds and retirement and pension funds, and I'll even send out a few crocodile tears to employees of Wall Street firms and hedge funds that will now see their income slip from the 98th percentile to the 96th, or God forbid, find themselves unemployed.
Today's trading saw a narrowing of the trading range, and this was finally reflected in a decline in the VIX, which dropped 3% to $25.28, despite the fact that the major indices posted losses on the day.
This is a reminder that "volatility" is non-directional, not a signal that prices are declining. Volatility, both historical and implied, is really a function of the velocity and magnitude of price movement. So there could be an scenario in which stock prices drip slowly lower and implied volatility also decreases.
As far as where the option activity was brewing today, we know that put activity in the financials was on the front burner, but volume in the drug and big pharma names were starting to cook at a low boil.
Pozen
(POZN)
, the maker of pain relievers, saw option volume run at eight times the average daily volume, and implied volatility nearly doubled to 150 over the past three trading days. Pozen is set to release earnings in late April, and some brave soul took the opportunity to sell volatility by selling the May 10 put and May 15 call for a net credit of $2.40 for the strangle.
Merck
(MRK)
saw option traders preparing for an increase in volatility and possibly a decline in shares over the next few months.
In this case, the big notable transactions consisted of someone buying the strangles, as investors await a decision from the FDA's investigation for a possible correlation of its asthma drug to suicidal ideation in patients.
Vertex
(VRTX)
was a big winner, gaining over 7.5% to $19.20 on positive news regarding its cystic fibrosis drug. While option volume was 11 times the daily average and more than five calls traded for every put, most of the trading appeared to be profit-taking.
For example, the most active strike was the May 17.50 call, which traded some 1,730 contracts, but this is only a third of the prior open interest, and most of the volume was done on the bid price, suggesting liquidation. If people were initiating fresh speculative bullish positions, they would most likely use the lower cost, higher-leveraged strike, such as the $20 call.
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.
