Tuesday's Options Recap

Sentiment

Stocks fell in early trading, but are trading mostly higher late-Tuesday after positive economic data helped offset worries about the banking industry and the swine flu outbreak. Stock index futures were in the red before the exchanges opened in New York after the World Health Organization listed the swine flu as a Category 4 out of a possible 6, saying it can spread fast but is not yet to pandemic.

Meanwhile, Dow components Citi (C) and BofA (BAC) were back under pressure after the Wall Street Journal reported that early stress tests indicate that both banks might need to raise additional capital.

However, after a modest decline at the open, the major averages quickly found a floor and were helped higher by a better-than-expected reading on consumer confidence. According to the index, consumer confidence rose to 39.2 in April, up from 26.9 the month before and much better than economist estimates of 29.7. A separate report, released earlier in the day, showed home prices falling 18.6 percent in February; which was bad, but in-line with economist estimates.

At the end of the day, the economic data seemed positive enough to help offset worries about swine flu and ongoing problems in the banking industry. The Dow Jones Industrial Average is up 25 points heading into the final 45 minutes of trading. Breadth is mixed, with 17 Dow stocks lower and 13 higher. The NASDAQ is up 2 points. The CBOE Volatility Index (.VIX) is down .68 to 37.64 and roughly 4.9 million puts along with 5.5 million calls traded so far.

Bullish Flow

Pfizer (PFE) is down 17 cents to $13.32 and one of 16 Dow stocks under water midday Tuesday. Shares slipped after the drug company reported quarterly earnings of 54 cents per share, which beat Street estimates by a nickel, but revenues fell 8.7 percent to $10.87 bln and below the $11.08 bln analysts were expecting. Trading in PFE options is active and the top trade of the day seems to reflect a bullish long-term view after an investor bought 27.8K Jan 2011 calls at the $22.5 strike for 45 cents.

Shaw Group (SGR) is up 70 cents to $29.38 and 7,800 calls traded so far, or about 16X the expected for the first hour of trading. The activity is scattered across May calls with strike prices between 27 and 33. The increasing activity is being attributed to unsubstantiated takeover chatter.

Bearish Flow

JDS Uniphase (JDSU) is up 22 cents to $5.16 and puts are actively traded ahead of earnings (April 29, after market). 8,500 puts and 870 calls traded so far. Looks like some investors might be concerned about possible post-earnings weakness in JDSU, buying June and Sept 5 calls.

Homebuilder DR Horton (DHI) is up 11 cents to $12.96, but directional sentiment in the options market seems bearish on increasing interest in August 11 puts. 7,235 traded and 74 percent hit ask-side. The top trade of the day is 500 contracts at the offer for $1.70. No news today, but the put buying is being attributed to a newsletter recommendation.

Implied Volatility Movers

Biocryst Pharmaceuticals (BCRX) implied volatility is elevated as the stock continues to rally as a "swine flu" play. Shares are up 18 cents to $4.06 today and up 132 percent since Thursday. Implied volatility has reached an extreme 275 percent, up from 146 less than one week ago.

Implied volatility is also high in Novavax (NVAX), BofA (BAC), and General Motors (GM). Meanwhile, implied volatility is easing in Baidu (BIDU), Paccar (PCAR), and Agco (AG).