Wednesday Options Outlook: XLF, MSFT, BRL, CCL, ARM, BWA, PXP, VIX

Rebecca Engmann Darst co-authored this article.

Financial Select Sector SPDR (XLF) – The financial sector ETF rose 7% to $18.41 by the noon hour, with 1.5 times as many calls trading as puts indicating at least a near-term breather for financials. Earlier in the session we’ve observed significant buying pressure in the July 17 calls, extending into the August contract at strikes 19, 20 and 21. September activity showed some evidence of traders selling calls at strikes 22 and 23, which could indicate a cap on any significant upside for the XLF over the next few months.

Microsoft (MSFT) – Microsoft shares continue to trade higher, currently showing 1.8% uptick to $26.60 ahead of its earnings report tomorrow. The near-expiration front month options are currently pricing in about a $1.70 move (6%) for Microsoft shares between now and Friday, which is moderate, and implied volatility on all Microsoft options actually indicates less perceived risk of turbulence over the next 30 days than it has already charted. Unwinding of July call positions continues today at strikes 25 and 26 as these positions appreciated in value today on the stock price movement. Buyers of call options have readily taken to the August contract at strikes 26 and 27, suggesting a stable view for Microsoft shares heading into next month.

Barr Pharmaceuticals (BRL) – Option implied volatility in Barr Pharmaceuticals rose 22% to 53.8% in early market action as its option trading activity quickly picked up to 9 times the normal level. The massive disparity between its 53.8% implied volatility reading and the 27.4% degree of deviation that Barr Pharmaceuticals shares have already documented suggests option traders pricing in twice the potential price risk over the next 30 days, heading into its earnings report on August 7 – an astonishing level so far in advance of earnings. With calls outmoving puts by more than 7 to 1 as shares read 2.3% higher at $47.15, the option here appears to favor the upside, with heavy action in August calls at strikes 45, 50 and 55.

Carnival Corp (CCL) – Shares in cruise liner Carnival Corp rose 4.6% to $31.64 today, trending with sector peer Royal Caribbean, on back of the oil price decline. An early spike in option trading activity that piqued our “Hot by Options Volume” scanner showed traders seeking not just long positions at the August 32.50 call line, but positioning via a 6,000-lot long call spread for sustained, marginal upside heading into the first of the year. The spread occurred between strikes 32.50 and 40 for a net debit of about $2.00, which implies another 7% upside move between now and mid-January just to break even. The $40 short strike would cap the upside for Carnival prices last touched in May. Interestingly, implied volatility in Carnival Cruises continues to loiter at 52-week highs, with the current reading on all Carnival options coming in at 55% - more than one-third higher than the historic reading on Carnival stock. Put open interest in Carnival has swelled since June and currently outsizes call open interest by nearly 2-to-1.

ArvinMeritor (ARM) – Automobile stocks continue to harvest relief gains following the decline in oil prices, but option traders aren’t relinquishing defensive or speculatively bearish positions just yet. Shares in auto parts supplier ArvinMeritor rebounded 4% to $11.00 in early trading, as we noted an increase in option trading volume to 8.6 times the normal level. This appeared in a 5,000-lot position at the August 12.50 line, which appears to have been bought on the call side for 55 cents and sold to the bid on the put side for $1.95. This looks to us like a short conversion strategy in which the trader may have sold short the stock, bought the call, and sold the put against that underlying position in an overall bearish view on the underlying stock.

Borgwarner Inc (BWA) –In another car industry play, shares in Borgwarner Inc the maker of powertrain components for car engines rose 8% to $40.15 today as its options registered an early volume increase to 11 times the normal level. Early on we observed what looked like August strangle activity ahead of Borgwarner’s July 31 earnings release, but it now looks like the 2,000-lot position we saw in the August 35 puts were bought independently at $1.35. This may have been funded in part via a 2,000-lot short calls spread between strikes 40 and 45, which would have generated a 63-cent credit for the trader with the proviso that shares not break the $40 mark by August 15.

Plains Exploration & Production (PXP) – Shares in Plains Exploration & Production, a West Texas/Gulf Coast-based driller, dropped 4.3% to $67.35 this morning. An early morning rise in option trading volume appeared due to an out-of-the-money 6,000-lot put spread in the November contract between strikes 45 and 60. This trade was logged to the middle of the market, so we are unable to confirm the order flow here, but the spread on this trade at $2.50 would indicate a buyer of this spread looking for a break at least below $57.50 by mid-November. A seller, meanwhile, would take the credit in anticipation of Plains Exploration & Production remaining well above the $60 level into the fall. The company’s shares have risen more than 25% this year so far, as it prepares to report earnings on August 6.

VIX - Shares rose amid a stronger U.S. dollar and a continued pullback in the price-per-barrel of oil followed a second day of congressional testimony by Ben Bernanke – in which the Fed Chairman appeared to conditionally sanction dollar intervention in some cases – and oil inventory data showed a build in crude oil and gasoline stores. News of a stricter interim limits by the SEC on short sales of major financial stocks, together with Wells Fargo’s better-than-expected Q2 results before the bell, chilled some of the euphoria in put trading that has become a hallmark of financial sector options in recent days. All of the above correlates negatively to implied volatility in the broader market, offering a reasonable explanation for the 5.5% drop in the reading on the CBOE Volatility Index, which currently sits at 26.96. Heavy call action in the now-current August series showed traders still locking in long protection at the 25-strike as higher strikes traded to buyers and sellers. We also observed what looked like a 5,000-lot call spread in September between strikes 22.50 and 25, which would indicate much tamer, more predictable readings in the volatility index heading into September.