Stocks are poised to open higher mainly due to two items: news that Merrill Lynch (MER - commentary - Cramer's Take) is set to receive some $5 billion investment from Singapore and a strong earnings report from Research In Motion (RIMM - commentary - Cramer's Take) last night, which has that stock poised to open around $11 (10%) higher, around $118 a share. Both issues should see above-average option activity and a decrease in implied volatility.
Despite this being an option expiration day I expect the VIX to continue to drift lower. It declined 3% yesterday to 20.45, and today could mark its first close below 20 in nearly two months. That said, the VIX futures such as the January and March contracts are trading at 23-25, that premium over the cash index suggests traders anticipate that volatility will pick back up after the new year.
Red Hat (RHT - commentary - Cramer's Take) should also see above-average option activity after the company reported better than expected earnings after the close of trading Thursday. The stock saw heavy call buying early in the January $20 calls, which traded more than 22,000 contracts on the day, but volume tapered as the day wore on. Implied volatility spiked above 50%, but even with the expected decline in IV these calls should be winners as the stock is poised to open over 10% higher around $21.50 a share.
Another stock to keep an eye on is Liz Claiborne (LIZ - commentary - Cramer's Take), which saw has seen its implied volatility climb to 55%. That's just shy of a 52 week high as overall option volume on the stock this week volume has run about 10 times its 60 day average. Most of the activity is taking place in the January $22.50 and $25 calls. It appears someone is bullish that LIZ has the right mix and amount of inventory for the holiday season.
P.S. Will you be there when Cramer makes his next move?
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Steven Smith Blog Ring the Register on RIMM 12/20/2007 3:07 PM EST What options are expecting and what to do ahead of earnings.
Steven Smith Blog You've Got the Look 12/20/2007 11:27 AM EST And look out for the SPY going ex-dividend on Friday.
Steven Smith Blog Looking Higher 12/20/2007 9:42 AM EST BSC, ORCL, N and RIMM are likely to dominate options action.
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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