Options: Investors Take to Energy
Jud Pyle CFA
01/02/09 - 05:35 PM EST
The first trading day of 2009 ushered in the new year with a rally in the major indexes. One group of stocks that managed to rally even more than the broader market was energy and commodity. Along with the rally came some noteworthy option activity to start off 2009.
For starters, take a look at
Schlumberger(SLB Quote). Shares of this oil service company traded up over 7.7% today to close at $45.62. One thing of note in this stock is that with the rally, the price of the January at-the-money straddle declined, a sign of declining implied volatility.
When we went home on Wednesday, the January 40 strike straddle was at the money, and it was trading for around $4.80. Today now, after the rally in the shares, the Jan 45 strike is the new at the money, but the price has come down to $4.33. So the at-the-money straddle went from 12% of strike all the way down to 9.6% of strike.
Another oil service company that saw a rally today was
Transocean(RIG Quote). You might remember we talked about RIG earlier this week because there was a substantial buyer of the Jan 2011 120 strike calls. Today RIG gets some more ink because the shares were up over 10% to $52.01.
The January at-the money straddle in RIG did not see as dramatic a decline as SLB experienced, but it declined nonetheless. As of the close on Wednesday, the January 45 strike was at the money, and it closed at $5.60. Today after the rally in the shares, the January 50 straddle was trading for $5.50 -- only a dime decline, but on a percentage basis it went from 12.44% to 11% of strike.
One last stock to look at gives a glimpse at how the metal stocks also rallied today. Iron ore producer
Cliffs Natural Resources(CLF Quote) saw its shares advance over 14% in Friday's trade. The at-the-money straddle also saw a decline in percentage as it went from the 25 strike and 15.9% of strike on Wednesday to the 30 strike and 13.8% today.
Perhaps what is most interesting about the activity today in these stocks is that there was no specific news to explain the big price jumps. However, it is worth remembering that this group of stocks had been pummeled since mid-July 2008, with most of them far underperforming the broader market in that time. With the rout in the stocks came spiking implied volatility.
Today's price action could suggest that investors were avoiding these stocks until 2008 ended. Now that the new year is upon us, investors are putting some cash to work. And as they pump up the share prices, they are reducing their fear, as seen by the implied volatility in the straddles. Is this a change in momentum for this sector or just a dead cat bounce? Time will tell.
Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.
