Tuesday's Options Recap

Sentiment

Stocks are moving broadly higher and the S&P 500 Index (.SPX) has recovered all of the losses suffered the day before. With one hour left to trade, the S&P 500 has added 26.7 points and is trying to move into positive territory for the week. Major averages traded bit higher at the open, but trading remained tentative following another round of weak economic numbers.

Data released early showed housing prices posting a record 18.5 percent drop in the fourth quarter. A little later, the Conference Board's consumer sentiment index showed a surprise plunge to a historic low of only 25 for February. Economists had expected a decline to 35 from 37. Attention then turned to Federal Reserve Chairman Ben Bernanke and his testimony to the Senate Banking Committee. No surprises there, as Bernanke basically rehashed the same concerns about the economy and deep-rooted problems in the financial world.

A strong rally developed around 1:00 Eastern time, however. While there was no one specific catalyst for the burst of activity, short covering helped lift many of the battered names including Dow components GM (GM), Citi (C), and BofA (BAC). At the same time, while the S&P 500 closed at a multi-year low yesterday, it held its November 21 intra-day low of 741.02 when it stayed above Monday's low of 742.37. Some shorts were probably closing positions while bargain hunters took new positions since that key level hasn't yet given way.

Risk perceptions are falling. The CBOE Volatility Index (.VIX) sank 7.93 to 44.69. Trading in the options market remains active, with approximately 5 million puts and 6.4 million calls traded so far.

Bullish Flow

Hartford (HIG) is up $1.59 to $8.27 and heading to session highs. One call buyer is being rewarded. Earlier today, with shares at $6.67, they bought 17K Jan 2011 calls at the $7.5 strike for $3.90. It was a straight call buy and not tied to shares, according to an exchange-floor contact. The call option is now trading for $5.00 and 26.6K contracts have traded, compared to only 206 contracts of open interest.

El Paso (EP) sits unchanged at $7.1 and 3,600 March 8 calls traded ahead of earnings Thursday (before market). The day's trades include six 500-lots traded at the offer for 25 cents on the ISE and the CBOE. ISEE Sentiment data is consistent with opening customer call buys.

Bearish Flow

Best Buy (BBY) is down 65 cents to $26.93 and 19,000 puts traded, almost 5X the number of calls. Activity is scattered across Mar, April and June puts with strike prices ranging from 27.5 to 20. It might be a sympathy play on Radioshack's (RSH) disappointing earnings. RSH down 20.3 percent. BBY reports on March 26.

Praxair (PX) is up 4 cents to $59.57 and, in the options market, investors have been showing some interest in puts on the Danbury, CT basic materials company. Open interest in PX puts increased by 44.3 percent to 15.1K contracts following a day of active trading in March 60 and 55 puts Monday. Those same contracts are active again today and implied volatility is up to 62.5 from 48.7 Friday. Long story short: looks like put buyers growing positions in PX.

Implied Volatility Movers

BofA (BAC) is seeing quiet trading for a change. Shares are up 19 cents to $4.10 and 77,000 contracts have traded, or about 40 percent the normal volume for midday trading. After reaching record highs near 260 Friday, implied volatility in BAC is back down below 200.

Implied volatility is also lower in Citi (C), Home Depot (HD), and Target (TGT). Meanwhile, implied volatility remains elevated in CIT Group (CIT), General Electric (GE), and LDK Solar (LDK).