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NetApp Takeover Rumors Stir Options Pot

OptionMonster

NetApp

NetApp(NTAP Quote) is up more than 5% and seeing intense options action today as takeover rumors circulate on the trading floor.

Average daily call volume for NTAP is 5,900, but this morning more than 17,500 traded in the first 45 minutes alone. The heaviest activity was at the January 15 strike (NULAC) and, while the early interest came in small prints, our tracking systems showed subsequent trades in blocks of 3,553, 1,535 and 1,404 all within a few minutes of each other.

NetApp is one of the companies considered to be likely targets of companies with large cash reserves, as I mentioned in a Barron's column yesterday. NTAP, which hit $10 on Nov. 12, is trading up some 5.25% today at $14. The activity is particularly noteworthy as trading in general slows to a crawl on this New Year's Eve session.

XLF Financial SPDR

Financial stocks have taken a beating in 2008 with one index down almost 60%, and one option trader is betting on more pain in the first quarter.

The XLF Financial SPDR (XLF Quote) came into 2008 near $30 and dropped to a low of $8.67 last month before rallying. The exchange traded fund sits at $12.31 in afternoon trading, up nearly 1.5% on the day.

The biggest options trade of the day was a put spread on the XLF, according to optionMONSTER's tracking systems. One trader bought 20,000 of the February 12 puts and sold an equal number of the Febuary 10 puts for a net debit of $0.64 on the $2 spread. Selling the 10 put reduces the cost and exposure to time premium.

The spread caps potential upside if the XLF falls below $10, but it need only drop to $11.36 at expiration to produce gains. And if it does go below $10, it will still be roughly a 200% gain on the trade. If the trader had just purchased the 12 put, the XLF would need to drop below $10.93 for profit at expiration and below $9 to produce a similar%age gain.

The implied volatility of the XLF is 66%, well off the high of 130 set on the low of Nov. 21. The 30-day historical volatility is much higher, at 108%. The 10-day historical volatility is more in line at 67.

The spread is a way to limit the cost of what is still historically high implied volatility while looking for the real volatility to keep up (to the downside, in this case).

VIX

The VIX(VIX.X Quote) has broken down below 40 for the first time since Oct. 1.

The S&P 500 is up 1.5%, breaking up through 904. Its volatility index is down 5.4% to 39.40 and falling. The January VIX future is down almost as much, sitting at 42.53, while February is at 44.05.

As I mentioned yesterday, this structure is bearish for the SPX. It is difficult to know how much credence to give this "signal" with the VIX so high, but we did see a similar structure exactly one year ago when the SPX was up near 1500.

S&P 500

As we close out this difficult year, something very interesting is starting to happen in the S&P 500 (SPX.X Quote) that is going to be important in 2009: We are not going far to the upside or downside in price.

More important, we are bound at this rate to break the longer-term downtrend line in place since October. This will happen more through time than price.

What does that mean? Well, if we think about a downtrend line as losing value with each passing day, this makes sense. That is in essence what a downtrend line is; it has a lower value for each day that goes by.

Therefore, if price stops going down, over time you will just plow through that line. That is what is happening right now.

At the same time, however, we are not seeing much of a drift up in price either. Instead, trading in the last week has meandered in a horizontal range. In some respects, the index is coming into some form of price equilibrium here, awaiting a catalyst to move it one way or the other.

As we head into the New Year we are going to get that catalyst in the form of the next earnings season, which begins in earnest in the second week of January. We also have the presidential inauguration, a new administration, and a host of new prospective stimulus plans that may be quickly launched.

All of that will be happening at the same time, which will make for some very interesting crosscurrents.

On the one hand, earnings are likely to be awful. On the other, there may be a substantial amount of hope generated around the various initiatives contemplated by the new White House. That could lead us back to some more wild rides where price is concerned.

For major support, the 850 area appears to be important once again for the S&P 500. That is pretty much near the low of the current range of the last week. A break below this level would put us back under the downtrend line but would not break the horizontal range.

Any substantial move above 900 would be bullish, leaving the downtrend line further behind each day that level can hold or be built upon. But we will have to wait for earnings season in all likelihood to see which way we will head for the coming quarter. Traders will likely not let price move to far up or down until we have greater clarity.