Thursday's Options Recap

Sentiment

Stocks battled back from early losses and are trading mostly higher late Thursday. After falling 184 points Wednesday, the Dow Jones Industrial Average opened lower after the latest weekly jobless claims report showed an increase of 32,000 to 647,000 in the week ended May 9. Economists were looking for an increase of 5000. Continuing claims hit another record, of 6.56 million.

Wal-Mart (WMT) is one of the Dow's losers. Shares fell early in the day and are down 1.8 percent after reporting quarterly earnings of 77 cents per share, which was in-line with Street estimates, but revenues fell short of expectations. GM is the biggest loser in the industrial average, off 4.1 percent amid ongoing worries about the automaker's long-term financial outlook.

However, despite an early decline along with weakness in GM and Wal-Mart, the Dow Jones Industrial Average is back into positive territory with help from the financials. There doesn't appear to be any specific catalyst for the turnaround, but BofA (BAC) and Citi (C) are leading the Dow to a 75-point gain.

The options expiration might add to volume and volatility tomorrow as well. Friday is the last day to trade May options. Approximately 7.7 million calls and 6 million puts have traded so far. With about 40 minutes left to trade, the CBOE Volatility Index (.VIX) is down 2 points to 31.65.

Bullish Flow

The ISE Regional Bank Index (.JLO) is seeing more volume than usual. The index is up 53 cents to $17.70 and most of the action happened early in the day after the May - June 17.5 call spread traded 11900X for $1.20 on the ISE. It appears to be a roll from May to June calls and since ISE Sentiment data suggest that 50 percent of those trades were customer buys, it looks like the May contract was sold-to-close while June bought-to-open. Another 4,600 May 17.5 calls traded later. It appears those were bought-to-open for 45 cents.

Life insurance company Lincoln National (LNC) is up $2.06 to $16.48 after the company declared a 1 cent dividend on common stock and 75 cents on preferred. In addition, Reuters reported yesterday that LNC is among a number of companies looking to shed its asset management biz. It isn't clear whether either of these events is driving the action in the shares, but sentiment in the options market seems very bullish as well, with 19K calls traded, or about 10X the number of puts. May 16 and May 19 calls, which come off the board tomorrow, are the most actives. Implied volatility is little changed at 45.

Bearish Flow

Gold Fields (GFI) is up 12 cents to $12.37 after gold erased early losses and moved up $1.70 to $927.60 on the session. GFI options volume is running 2X the average daily. Most of the activity is in the October contract after one strategist appears to have bought the Oct 10 - 12.5 put ratio spread (1X2) for 35 cents. Looking at the open interest suggests a possible roll from the October 10s (close) to the October 12.5s (open). (Possibly closing out positions opened in early-mid-April for $1.65 and $1.85.)

SPDR Retail Trust (XRT) puts are active. XRT, which is an exchange-traded fund that holds shares in 52 companies from the industry, is up 19 cents to $25.71. Sentiment seems cautious in the options market after 30K Sep 20 puts traded. 10K traded on the ISE, where sentiment data indicate customers were buying to open. The defensive trading comes the day after monthly retail sales numbers showed a .4 percent drop in April (vs. 0 percent estimate). Wal-Mart (WMT), the largest component in the XRT (WMT is largest by market value and not by weighting within the ETF), is down 43 cents to $49.60 after reporting in-line earnings, but revenues shy of analyst estimates.

Implied Volatility Movers

The CBOE Volatility Index (VIX) is easing and has been flirting with the 32 level and is dipping towards 31.5 Thursday. The market's "fear gauge" has been trending lower in recent weeks and some market watchers are wondering what will happen when VIX approaches the 30 "psych" level: i.e. Could VIX at 30 represent an important signal for the US equity market?

Implied volatility is also lower in Wal-Mart (WMT), General Motors (GM), and Sony (SNE). Meanwhile, implied volatility is higher in Tessara Tech (TSRA), Atmel (ATML), and Las Vegas Sands (LVS).