Stocks higher after lousy employment – volatility stays stubbornly high

Today’s tickers: VIX, XLF, MOS & POT VIX – CBOE Volatility Index – Investors are becoming accustomed to obscure reactions whereby bad news often sends a buy signal for example. Today’s response to the highest reading of unemployment since 1993 sent stocks surging, presumably because it expedites Washington’s mission. We have noted throughout the week that investors have been more willing to sell volatility using options and today is no exception. Lower volatility infers less likelihood of larger swings in the stock market going forward. The VIX index although lower by 2.5% at 42.63 remains stubbornly high and close to its new found floor at 40.0. One trader seems to be taking this rally and weakness in option premium to initiate a long volatility combination with a 12,000 lot spread. Using the March call options the investor appears to have bought 12,000 calls at the 50 strike at 1.70 while selling the same amount at the 60 strike also expiring next month at 70 cents. The net 1.0 premium means that this trader expects the VIX index to stray back above a breakeven price of 51 by expiration. The maximum gain of 9.0 points would occur at any price above the upper strike of 60. XLF – Financial Select Sector SPDR – The broadly firmer market tone and a rebound in shares of Bank of America after CEO Lewis put his money where his mouth is by buying 200,000 shares in the bank he runs, helped the financial sector rebound 5% to $9.57 on Friday. Investors are also optimistic that the Senate will resolve to pass a stimulus package before Timothy Geithner at the treasury unveils the framework of the so-called bad-bank plan. The call/put ratio in options on the XLF at 4.3 indicates option traders’ appetite for bull plays today. The sector has been so badly beaten down for fear of further losses and potential nationalization of some of its members that a rebound is within the realms of acceptability. In the March contract the 9.0 strike calls are in demand and so far some 88,000 contracts have changed hands with 1.52 being paid as we write. Option implied volatility isn’t giving up its stance and today reads 90%. We’re now seeing volume in the 13 strike calls in February where buyers are paying 31 cents for rights to buy the shares at the fixed price of $13.00 before options expiration two…