With earnings season right around the corner, options traders were girding themselves Friday for big moves in bellwether technology names.
Options action shows the market is preparing for big swings in names such as
, both of which are slated to report earnings early next week. Yahoo! shares took a hit Friday following a
Deutsche Banc Alex. Brown
downgrade, slipping 6 3/16, or 5.1%, to 116 3/16. Motorola was holding steady, up 3/4, or 2.3%, at 32 3/4.
Options traders use a measure called implied volatility to gauge expected movement in a stock. When market makers raise implied volatility, they are expecting bigger movement in the underlying securities' price, either up or down. Implied volatility readings often rise ahead of an earnings report.
Implied volatility in Yahoo!'s July 115 options was around 81-82 Friday, up from Thursday's preopen reading of 73-74, said Paul Foster of
Yahoo! August 125 out-of-the-money calls were active, with 4,515 contracts trading on the CBOE, compared with open interest of 839 contracts as of Thursday's close. Open interest refers to the number of contracts in existence. The calls were trading down 3 ($300) to 8 1/4 ($825). The source of the volume could be traders selling the calls to collect premium on the hope that the options expire worthless.
Motorola's implied volatility was also higher ahead of its earnings report, which is slated to be released next week. Foster said implied volatility on the out-of-the-money July 33 3/8 calls was 63-64, while it was 62 for the puts, up from yesterday's reading of 55-56.
Meanwhile, the CBOE volatility index, which is used by traders as a measure of anxiety in the market, dropped sharply Friday in the
wake of a market-friendly June
employment report. The index, better known as the VIX, had surged in recent sessions ahead of the jobs report.
The Options Frenzy
Competition among options exchanges keeps heating up. The latest sign comes from the
Chicago Board Options Exchange
, which in an effort to boost its market share plans to pay brokerage firms for orders.
The CBOE told members Thursday it plans a payment-for-order flow program under which it will collect a fee of 40 cents a contract from designated primary market makers and market makers in all equity option classes that trade at the exchange.
Under payment for order flow, as the practice is known, market makers and specialists pay brokerages for sending them orders. Critics of the practice argue that it provides incentives against finding the best price for execution. Payment for order flow, which has existed in the equity market for some time, is a relatively new phenomenon in the options market and grew for the most part out of the multiple listing of options, which triggered competition among firms for market share.
The CBOE also announced to members a "Best Execution Assurance Program," or BestEx, in part to help assure customers that payment for order flow isn't interfering with best execution. Under BestEx, each firm will receive a report in the morning showing at what price their orders were executed on the previous trading day and what the best national best bid offer was at the time of trade execution.
As far as the amount of money that is paid for orders, that decision will remain a matter for DPMs and the brokerage firms to negotiate. Under the CBOE plan, the DPMs will tell the CBOE to pay a certain brokerage firm a certain amount of money per month for orders executed at the exchange and the CBOE will then pay the brokerage firm for the orders from the money collected from the market makers in the 40 cents a contract fee. The CBOE plan was reported in Friday's editions of the
Wall Street Journal
The CBOE plan is in response to a loss of market share in certain options to other exchanges where market makers or specialists at those exchanges pay for order flow.