Options Report: Speculators Burned Chasing Beazer Rumors

Speculators in homebuilder stock options had a volatile day as they chased rumors that Beazer Homes was about to file for bankruptcy, only to hear the company deny the rumors.

As one trader said: "It's a chiropractors' market as we whip up and down".

At one point late in the morning, shares of Beazer plummeted more than 40% as credit concerns engulfed not only Beazer shares but several other homebuilders.

“The market has gotten extremely sensitive to any kind of negative development," says Scott Fullman, director of investment strategy at IA Englander. "We’re seeing it with the increased volatility in individual stocks and the swings in the market.”

Fullman, who is a Registered Options Principle, says chasing after rumors by buying options is a "dangerous game."  He says "we’re going to see the market moved by rumors for another week or two until this settles down. The market is very susceptible."

Beazer has since called the rumors "scurrilous" and "unfounded" enabling the stock to bounce well off the lows of the day.

As Beazer shares tumbled to a low of $8.10 from an early trading day high of $14.01, the out of the money August 10 puts rose 30-fold from early trades of 10-cents to an intraday high of over $3 as implied volatility surged briefly to the 300% level.  Once the rumors were refuted, and the stock rebounded, the puts quickly lost more than half their value from the spike-high of the day.

For any speculator who bought at the high of the day in the gyrating Beazer options, they've been "burned badly", says Fullman.

Put speculators had been steadily accumulating puts in unprofitable Beazer, a company that's under federal investigations over loan practices at a North Caroline housing development.  Put buying was especially heavy this past Friday as nearly 8 puts traded for every call.

A similar downward spike occurred in shares and options home builder Hovnanian , which briefly saw implied volatility in its options surge to 130%.  The August 12.5 puts opened at 55-cents, surged to as high as $2.20 but have since settled back to about $1.50.

Elevated Volume and Volatility

There's no shortage of financial names seeing an increased level of fear and bearish speculation expressed by options volume and rising implied volatility.

Novastar , one of the earliest subprime lenders to crumble, is sporting an implied volatility level in options tied to the stock of over 200%.

Speculators continue to bet against Countrywide Financial where implied volatility has surged to nearly 80% in front month options contracts.  Put volume is outpacing call volume in the Wednesday session by a margin of 5 to 1.

Paul Foster, options strategist at theflyonthewall.com also notes active put volume and rising volatility in names including: H&R Block, National City, Sovereign Bancorp, Washington Mutual, PMI Group, Accredited Home Lenders and Americredit.

Overall market volatility remains elevated as the Chicago Board Options Exchange Volatility Index has again crossed the 24 level - the highs of the year.

As the VIX rises, Rebecca Engmann Darst, options analyst at Interactive Brokers points out that speculation in VIX put options is "implying a prolonged outlook for elevated volatility through the next month."

Nearly 105,000 VIX contracts have moved today, with front-month volume centered at the August 25 call, where about 45,000 contracts have traded. An additional 8,500 contracts were also logged to the September 25 call.

© 2009 CNBC.com