Speculators continue to have a big appetite for buying volatility, at least if trading in options of the Volatility index is any indication. The VIX has been holding close to where it left off after Friday's sell-off in spite of today's market rebound, indicating that traders are anticipating more swings in the market.
There are some who may be anticipating more than just market swings. For a second consecutive trading day there is heavy activity in the VIX August 30 calls, a bet that the VIX will surge to above 30 before the options expire on the third Friday of August
"Someone is betting on a calamitous event to impact the market," says Andrew Wilkinson, chief strategist at Interactive Brokers. "The fears that have dogged us over the summer won’t lie down". Wilkinson says the buying of the August 30 calls is "out of this world", adding that the "back drop of lower rates is not stopping traders from buying volatility".
August 30 call volume of over 11,000 contracts today is exceeding open interest for a second day. The Volatility index has not traded above the 30 level since the dark days of the bear market in 2002.
Options speculators jumped into call options of telecommunication equipment maker Tellabs at the high of the morning, hoping to snag a large profit from a buyout scenario. But they're already losing money.
TheStreet.com, citing a source it has not named, reports a joint venture of Siemens and Nokia has offered to buy that company for $16 to 17 a share. While up 600% on the day to 35-cents, the Tellabs August 15 calls traded as high as 60-cents as the stock surged on the open but then quickly pulled back.
The fade in the stock by nearly a-dollar from the morning surge has left some August 15 call holders with losses approaching 50% in just a few hours.
It's not that investors aren't expecting a buyout to emerge. Implied volatility has spiked above 60% as the market prepares for further fluctuations in the company's shares. But Tellabs shares faded as the issue of price quickly surfaced as an issue. An analyst at Jeffries says a potential deal for Tellabs makes sense, but said a price of $16 to $17 would be rich and recommended investors sell into strength.
Apple and Amazon Earnings Approach
Apple thus far remains an unstoppable market locomotive, hitting fresh all time highs again today. The maker of the iPhone, iPod and Mac posts earnings after the bell on Wednesday.
Options speculators are expecting a move of more than 10% one way or the other after earnings are reported. The Apple August 145 straddle, which involves a simultaneous purchase of both a call and a put at the same strike price, costs more than $16, meaning for the trade to be profitable, Apple shares will have to surge more than $16 higher, or lower.
Amazon earnings are due after the bell on Tuesday and a similar percentage move is expected as well. The Amazon August 70 straddle is pricing in a potential move either way of about $9 in the underlying Amazon shares.