If you read anything about the markets today, the general theme should be that volume was light. Traders and investors weren't doing much of anything on a day when the stock and options markets closed at 1 p.m. EST.
Despite the light trading volume, we did find a few interesting option trades to talk about that had one common theme -- call selling.
Let's take a look at
, a retail stock. In the first hour of trading, an investor sold 2,000 of the June 35 calls for 95 cents with the stock trading around $20.40, up 36 cents on the day.
What's remarkable about this is that these calls closed last night at $1.08. So with the stock up on the day, those calls are lower. That is a quintessential example of what happens when implied volatility in an option goes lower. In this case, these June 35 calls closed last night with an implied volatility of 76 and today traded with an implied volatility of 72.
Another example of call selling occurred in
, also a retailer. This time, an investor sold 1,000 of the March 30 calls for 90 cents with the stock trading around $21, up about 50 cents on the day.
Once again, these calls traded lower than last night's closing price, despite a rise in the stock. These March 30 calls closed last night at $1.27, so were down a whopping 37 cents despite the rally in the shares. On the implied side, it was a decline from 95 all the way down to 81.
So what's a motive for this type of activity? One possibility is that this is an investor who already owns the shares of Children's Place and Buckle and is selling the calls, because if the stocks rally all the way to those levels, they are happy to sell their shares.
We call this a buy write -- buy the stock and sell (or "write") the calls. Another motive is that it is a bearish investor who, rather than shorting the shares, is willing to bet that the stocks will never rally enough to have him need to deliver the shares.
This type of activity does not mean that investors should run right out and sell their shares of Children's Place or Buckle. But it is useful to be aware of what at least one investor believes about the prospects for the stock. It also is indicative of just how much implied volatility can come in when sellers of options take action.
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.
Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."