Options: Market Rally Brings Heart

By Jud Pyle, CFA, chief investment strategist for the Options News Network

Today's market rally was accompanied by a decline in the CBOE Volatility Index (VIX Quote). This is a fairly common occurrence: When the market rallies, the VIX has a tendency to decline as fear abates, and implied volatility declines. Two option trades that we saw in Paccar (PCAR Quote) and T. Rowe Price (TROW Quote) served to illustrate put-selling that was indicative of the declining fear levels.

Looking at PCAR, we see that more than 6,000 of the May 20 puts have traded vs. open interest of 7,295. PCAR rallied $1.26 today to close at $22.15 and the puts closed $2.05. Given the open interest and the size of the volume today, it is likely that this trade was initiated by an investor who was selling these puts to close. PCAR recently hit a 52-week low of $20.38 on March 6.

Next, taking a look at TROW, we find that more than 12,000 of the April 20 puts have traded vs. open interest of 3,679. TROW rallied $3.50 today to close at $24.67 and the puts closed $1.08.

A little more than two months ago, we wrote about put-buying in TROW. Since that time, the shares have slid, also touching a 52-week low on March 6. That put buyer owned the April 22.5, 25 and 30 strike puts. This put sale of the 20 strike could be a way to take some profit on the previous bets.