Friday's Options Recap

Sentiment

After a steady open, stocks faltered in morning trading and volatility picked up in the second half of trading on options-expiration Friday. The Dow Jones Industrial Average held modest gains early following better-than-expected data on industrial production, manufacturing, and consumer sentiment.

However, the rally ran out of steam early and General Motors (GM) led a morning slide in the Dow Jones Industrial Average. GM is down 5.85 percent at $1.10 per share due to ongoing worries about the automaker's financial well-being. BofA (BAC) is down 6.2 percent to $10.60 and falling to its lows of the day and the week.

Besides BAC and GM, twenty-four other Dow stocks are lower, six are higher, and the Dow is down 99 points heading into the final 50 minutes of trading. Volatility is picking up a bit on expiration Friday. The CBOE Volatility Index (.VIX) is up 2.21 to 33.58. Approximately 7.4 million calls and 5.8 million puts have traded so far.

Bullish Flow

Alcoa (AA) is among the winners in the Dow Friday. Shares saw a spike early in the day after CNBC reported that Goldman Sach resumed coverage on AA with a Buy rating. Alcoa is up 21 cents to $8.95 heading into this week's final hour of trading. Volume is picking up in the options market, with 40,000 calls and 15,000 puts traded so far. May 9, May 10, June10, and June 12 calls are the most actives.

Diana Shipping (DSX) is up 45 cents to $15.14 as the dry bulk shippers show relative strength after a rough week. DSX is up today, but down 3.5 percent since Friday. GNK, EGLE, DRYS have seen similar action this week (Link to story on web site). In the options market, DSX calls are active, with 6300 contracts traded, or almost 6X the expected midday. June 15 and May 12.5 calls are the most actives and it appears that premium sellers are dominating the action, perhaps on view today's move is a counter-rally in a bear trend. DSX is down 18.5 percent since May 6.

Bearish Flow

Nortstrom (JWN) is up $1.48 to $22.43 after reporting quarterly earnings of 31 cents, which beat by a nickel, and raising 2010 guidance to $1.25 to $1.50 (vs. $1.10 to $1.40 consensus). JWN (which saw bullish order flow Wednesday ahead of the news–Link on web site) is up and options volume is running 4X the usual. 48K contracts traded so far and 65 percent of the activity is on the put side of the options chain. The top trades of the day include 12K Jan 17.5 puts bought by an investor for an average of $2.675 per contract. Implied volatility is down to 62, from about 74 the day before.

First Energy (FE) is down $4.59 to $35.75 and puts are active after Jefferies and Barclays both downgraded the stock today. Barclay's lowered the stock to Equal Weight from Overweight, and lowered price target to $44 from $53. Jefferies downgraded to Hold from Buy and price target to $38 from $50 after a disappointing Ohio power auction. Shares are taking a hit and some short-term players are scrambling to buy May 35 puts. 2500 traded, compared to open interest of 422. Implied volatility is to 41.5, from about 36 the day before.

Implied Volatility Movers

Tessera Tech (TSRA) implied volatility is up for a second day ahead of an expected ruling in an ITC wireless action suit on May 20. Shares are down $1.27 to $15.5 and implied volatility jumped to 128, up from about 105 to days ago.

Implied volatility is higher in Smith and Wesson (SWHC), PNC, and the S&P 500 Index. Meanwhile, Implied volatility is lower in Dryships (DRYS), Nordstrom (JWN), and Abercrombie (ANF).

Comments

[John Olagues:]

Frederick;

What would you say to an executive who wanted to hedge his employee stock options by listed selling calls and buying listed puts?
John

May 16 12:46 AM