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Put Activity Heating Up into Earnings


Upcoming reports, expiration could help spice up your portfolio.

Even as the market has recovered from this morning's gap lower, option activity remains defensive. For the second consecutive day, the overall put-call ratio is running around 1.25. This compares to the 20-day moving average of 0.77. Granted, some of this put volume is due to spreading, specifically rolling, which is not as bearish as an outright purchase, but it still reflects the underlying caution of investors.

The VIX, which has lifted some 20% over the past four sessions, is inching lower at 28.15, which is still a very healthy 10 percentage points above the 10-day realized volatility of 15% in the S&P 500 index.

Roll into the New Year

A general theme that's developed in the past few days of rolling out, and sometimes up, put protection is playing out again today. That is the sale or liquidation of near-term puts and the new purchase of those with a later expiration and sometimes higher strike price.

This makes sense on several fronts: As October expiration will be just 12 days away come Monday, theta or time decay will start accelerating down the steep part of the slope. Many, actually a majority, of S&P 500 companies will be reporting earnings after the October 16 expiration.

While the market has had about a 5% pullback from the seven trading sessions, there are still monster gains from the March lows and money managers would be foolish to let those slip away during what could be a rocky fourth quarter. The result is it looks like a lot of put positions are being adjusted and moved out.

Some of the most active put activity is coming in financials with names like PNC Financial (PNC), which is seeing what looks like a big switch from the November $31 and $36 puts up and out into the January $44 puts. In all, more than 65,000 puts have traded compared to just 10,000 calls.

Wells Fargo (WFC) has seen some monster rolls, and I'm not talking sushi, with selling in the October $24 and $27 puts and buying of the January $20 and $27.50 puts. All told, some 350,000 puts have traded to 45,000 calls.

Of course Citigroup (C ) remains the volume leader as it has become the most popular trading sardine among the broken banking sector. It averages some 750,000 option contracts a day. But given that it still has a relatively low price, it tends to see a lot of call activity that's been tied to both arbitrage stemming from conversion of government warrants and simple speculation.
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No positions in stocks mentioned.

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