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Options Focus on Ethanol and Dental Technology

Published: Wednesday, 21 May 2008 | 10:58 AM ET

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By: Andrew Fisher

The options market is getting excited about an ethanol producer and dental technology, according to one expert.

Traders seem to think Pacific Ethanol [PEIX Loading... () ] is due for more action in the coming weeks, suggested Rebecca Darst of Interactive Brokers. Put (the option to sell a stock in the future) and call (the option to buy) activity has been high, she said.

"Pacific Ethanol, which is a stock that has really taken a beating over the past 52 weeks, was able to pull off less dire than many had anticipated earnings, and that occasioned massive upside in the sector," Darst said Wednesday on CNBC's "Squawk on the Street." (Click here for Pacific Ethanol earnings).

"Its options have moved on very high volumes for the past two days running, trading at 21 times the normal on Monday, 5 times the norm yesterday. A couple of phenomena that were very interesting to note here with Pacific Ethanol: Usually after a company reports earnings, you'll see that implied volatlity hits a crisis point, or hits a high before the numbers come out, and then dissipates very quickly thereafter. In the case of Pacific Ethanol, we saw its implied volatility actually go up after the numbers on Monday, and continued higher yesterday, which was a fantastic opportunity for a lot of people who were interested in trading both sides of the volatility equation. We also saw massive interest in calls -- of course, there's been some speculation that may be due to short covering in the market -- still, there are a number of scenarios presenting themselves in the market that are interesting to track."

The situation is an offshoot of oil market turbulence, she suggested.

"I think it's safe to say that, simply as a function of $130 oil, that ethanol producers are going to continue to present volatility and volume trading oppoertunities for people in the options market, simply because any company that can present a reasonably palatable alternative to conventional energy production is going to draw a second -- or even a third or a fourth -- look from traders in the options market," she said. "We saw it last week, with a keen level of interest and spikes in implied volatility in a lot of the solar names, and this week, it sort of spilled over into ethanol, and this has been occasioned in large part by an upside earnings surprise by Pacific Ethanol, which has been the name to watch all week. They had better than expected earnings -- this is even despite the fact that ethanol as a solution to energy problems is very problematic. I mean it has a very onerous effect on food-price inflation, it's troublesome from a pollution standpoint.."

Dental Technology

Darst also reported that options traders seem to be circling around some dental technology plays.

"It's interesting, and I say that this is a sector play simply because we saw some unusually bullish call activity in Align Technology [ALGN Loading... () ], which is the company that makes Invisalign invisible braces. This was followed up yesterday by some interesting activity in Sirona [SIRO Loading... () ], which is a maker of hygienic equipment and dental imaging systems. We saw it straddle sellers yesterday in the July 25 contract, so people taking a premium on dental technology, that's an area to watch."