Tuesday's Options Recap

Sentiment

Stocks are trading modestly lower late Tuesday. The major averages slipped on profit-taking early after the Dow Jones Industrial Average rallied 214 points the day before. A lot of attention remains on the banking names after the Wall Street Journal reported that 10 of the 19 facing stress tests might be asked to raise capital.

After gaining more than 10 percent Monday, the Select Sector Financials (XLF) are down 15 cents to $11.58 ahead of the stress test results, due Thursday. JPM's CEO Dimon told Reuters that most firms will release results to shareholders Friday.

Meanwhile, the day's economic data showed improvement in economic activity outside of the manufacturing sector. The ISM Services Index rose to 43.7 in April, up from 40.8 in March and better than economists' forecasts of 40.8.

Investors now brace for three days of jobs numbers, including the ADP private sector report Wednesday morning, weekly jobless claims Thursday, and payroll numbers Friday.

Trading is understandably cautious ahead of the jobs numbers and stress test results. The Dow Jones Industrial Average is down 40 points heading into the final forty-five minutes of trading. The CBOE Volatility Index (.VIX) is little changed at 34.42. Approximately 7.3 million calls and 5 million puts traded across the exchanges thus far.

Bullish Flow

SPDR Homebuilders Trust (XHB) is down 20 cents to $13.89 and options volume is running 4X the usual, with 73,000 calls and 7,100 puts traded. The top trades of the day seem to reflect a bullish view on the exchange-traded fund after a player bought the Sep 13 - Dec 14 call spread nearly 20000 for a nickel–which is possibly a roll (closing Sept to buy December). Sept 17 calls are also actively traded, with several blocks totaling 23K contracts trading ask-side earlier in the trading day (does not appear to be related to the call spread).

Geron (GERN) is up 74 cents to $6.06 after the California Institute of Medicine, the state's stem cell agency, approved two multi-year, multi-million grants to UC Davis Health to develop stem cell therapy for diseases like Huntington's, sickle cell anemia, thallassemia and other inherited blood disorders. In the options market, 9,500 GERN calls and 715 puts traded. Investors are showing interest in GERN May and June 7.5 calls as stem cell plays (STEM, ASTM) move higher Tuesday.

Bearish Flow

June puts on the iShares Ultra Short S&P 500 Fund (SDS) are active Tuesday. The leveraged fund moves inversely to the S&P 500 and rallies when stocks fall. Conversely, SDS sinks when the S&P 500 rallies. One strategist appears to be looking for a decline in the SDS and is taking a bearish position in June puts with a substantial condor -- which is an advanced options strategy that includes selling options with two different strike prices (short strangle) and hedging that position by purchasing two options with different strikes (long strangle). In this case, the strategist sold 10000 June 49 and 10000 June 50 puts, while buying 10000 June 56 and 10000 June 45 puts. It appears to be a very bearish bet on SDS, which best profits if the fund closes between $49 and $50 at the June options expiration.

Implied Volatility Movers

Implied volatility in Dryships (DRYS) is high as the stock continues its run higher. Shares are up 23 cents to $9.71 and up more than 30 percent since the company reported better-than-expected earnings last Thursday. Trading in DRYS options is brisk, with 77,000 calls and 15,000 puts traded. Implied volatility is up to 125 from multi-month lows of 118 set the day before.

Implied volatility is also higher in Legg Mason (LM), PNC, and Wells Fargo (WFC). Meanwhile, implied volatility is lower in MGM Mirage (MGM), Kraft Foods (KFT), and Alcatel Lucent (ALU).

Comments

[RiskReturnO...:]

Interesting put activity on SDS.

Has there been comparable call activity on SSO?

Does this pair (puts on SDS) vs. (calls on SSO) trade at comparable prices (vs. strike)?

Are there any arbitrage opportunities?

May 05 05:48 PM