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A sharp bounce off its 120-day moving average earlier this month helped send Morgan Stanley (NYSE:MS) to a four-year peak of $34.57 on Monday, and yesterday's close at $34.40 is just a stone's throw from this notable milestone. Against this backdrop, call volume accelerated to 1.7 times the average daily pace on Tuesday; however, not all of the activity was of the traditional bullish variety.
Drilling down, the two most active strikes in MS' options pits yesterday were the September 36 call and the September 35 call. The higher-strike calls were mostly traded at the bid price, pointing to seller-driven activity, while the lower-strike calls crossed at the ask price, suggesting they were bought. Open interest rose at both strikes overnight, making it safe to assume new positions were initiated.
By selling to open the September 36 calls, traders are expecting MS to stay south of the $36 mark through the close on Friday, Sept. 19, when front-month options expire. Meanwhile, by buying to open the September 35 calls, traders are banking on the stock to finish north of the $35 mark at expiration.
Currently, it appears to be a more opportune time to purchase premium on these front-month options, as opposed to selling premium. The stock's Schaeffer's Volatility Index (SVI) of 17% ranks lower than 96% of comparable readings taken in the past year. Plus, implied volatility at both the September 36 call and September 35 call is deflated relative to the equity's 30-day historical volatility (16.2%, 16.9% vs. 21.7%). Simply stated, MS' September-dated options are pricing in low volatility expectations at the moment.
On the fundamental front, Morgan Stanley (NYSE:MS) scored a legal win against fellow financial firm Charles Schwab Corp (NYSE:SCHW) on Tuesday. Specifically, the Financial Industry Regulatory Authority said MS did not poach former SCHW advisers in San Francisco in 2011, ending the two-year, $15 million lawsuit.