Monday's Options Recap

Sentiment

Stocks are trading broadly higher late Monday. BofA (BAC) is up 10 percent and the best percentage gainer in the Dow Jones Industrial Average after Goldman Sachs added the bank to its Conviction Buy list. Home Depot (HD) is also seeing relative strength after rival Lowe's (LOW) posted better-than-expected earnings before the bell.

The advance isn't limited to the banks and retailers. Only one Dow stock--AT&T (T)--is under water and the industrial average is up 200 points.

The SPDR Homebuilders Trust (XHB) is up 68 cents to $12.77 after the latest NAHB Homebuilders Index (HMI) improved to 16 in May, up from 14 the month before an in-line with economist estimates. The news comes one day before housing starts data, which could set the tone for trading Tuesday morning.

In the options market, sentiment remains relatively upbeat. With about 45 minutes left to trade, the CBOE Volatility Index (VIX) is down 2.67 to 30.45 and came within striking distance (30.29) of the 30 "psych" level. Trading is active, with approximately 7 million puts and 4.9 million calls traded so far.

Bullish Flow

Homebuilder Lennar (LEN) is up $1.36 to $10.17 and eased off session highs ($10.42) after the latest NAHB Homebuilders Sentiment Index (HMI) showed improvement. LEN had already enjoyed a run higher in morning trading after Citi upgraded the stock to Buy from Hold. In the options market, 13K LEN calls traded today, compared to 3000 puts. Implied volatility edged down to 77, from about 87 late Friday.

Allstate (ALL) is up 50 cents to $24.80 and options volume is running 4X the average daily. Most of the activity is in the July 29 - October 35 call spread, which was traded 31000X for 15 cents. In this trade, the strategist bought October 35 calls (possibly closing a position opened May 7 when 30K sold for $1.35. Stock at $27.53 at the time) and sold-to-open July 29 calls. It looks like a possible position adjustment and perhaps tied to a buy-write strategy (long stock and short calls.)

Bearish Flow

State Street (STT) is up $2.46 to $40.97 after the bank announced a public offering. STT plans to raise $1.5 billion to repay TARP funds. Investors cheered and sent the stock higher Monday. Some options traders seem a bit more cautious. The top trades of the day include 10,000 June 40 - 45 call spreads; which were sold along with the purchase of 10,000 June 38 puts.

The investor paid 10 cents for the entire package, according to a floor contact. In addition, since volume easily exceeds existing open interest in all three contracts, the trade appears to be a new position. If so, the strategist probably expects STT to stay below $40 per share and perhaps even make a substantial move below $38 before the June expiration (32 days).

Implied Volatility Movers

Bank of America (BAC) implied volatility is falling as the stock rallies on positive broker chatter Monday. BAC June 12 call is among the most actively traded contract, with more than 61,000 traded. Meanwhile, implied volatility is easing to multi-month lows below 90, down from 96 late Friday.

Implied volatility is also lower in State Street (STT), Lowe's (LOW) and Lennar (LEN). Meanwhile, implied volatility is higher in Black & Decker (BDK), General Motors (GM), and Tessera Tech (TSRA).