Tuesday's Options Recap

Sentiment

Trading slowed to a crawl Tuesday. The major averages opened lower after the latest housing data showed record lows in both housing starts and building permits during the month of April. The news put pressure on stock index futures and when the bell rang on Wall Street, the Dow Jones Industrial Average suffered a modest decline at the open.

However, the selling never really gathered any momentum and the Dow Jones Industrial Average battled back to positive territory midday. It is up 14 points heading into the final forty-five minutes of trading and spent most of the day's trading session going nowhere. The Dow has traded in a very narrow 75 point range.

18 Dow stocks are higher and 12 lower. Citi (C), GM and GE are the best gainers. Home Depot (HD) is the biggest loser in the industrial average. HD is down 5 percent after reporting better-than-expected quarterly earnings, but warning that many markets remain under pressure.

The slow action has lulled options traders to sleep. The CBOE Volatility Index (.VIX) made a decisive break of 30.00 and is down 1.82 to 28.42. As VIX falls to 8-month lows, volume is slowing as well. Approximately 7.1 million calls and 5.1 million puts traded so far.

Bullish Flow

Hewlett Packard (HPQ) is up $1.05 to $36.78 and options volume is running 4X normal levels ahead of earnings. The computer maker is expected to post a quarterly profit of 86 cents per share, a penny less than a year ago. 57K puts and 45K calls have traded ahead of the news and the day's volume seems to include a lot of premium selling (8 of the top 10 trades hitting on the bid). Implied volatility is falling to 36.6 from over 40 the day before. At the same time, however, an implied volatility skew exists between the June (37 percent) and July (33.9 percent), which hints at a possible earnings-gap move of more than 5% when HP reports after the closing bell.

Collective Brands (PSS) is up 52 cents to $15.16 and activity is picking up in December 15 calls. 5,800 traded and about 72 percent hit ask-side. The top trade of the day is 480 contracts for $3.50. The volume is perhaps unwinding of an existing position as open interest is 7500 contracts. PSS implied volatility is elevated, at 83, but not much changed on the day. The uptick in call volume comes ahead of a June 4 earnings report.

Bearish Flow

SPDR KBW Regional Banking Index (KRE) is down 73 cents to $21.06 and June 17.5 puts are seeing volume after a player bought 75K contracts for 35 cents. Looks like a new position. Implied volatility is up to 56.5 from about 53.5 a day earlier.

Ann Taylor (ANN) options are active ahead of earnings tomorrow (before the bell). 7,700 puts and 1,800 calls traded. Sep 5 puts are the most actives, with 5,165 traded, including two block of 2500 (total) at the offer for 25 cents on the ISE and PHLX. Looks like buyers ahead of the news, but possibly closing existing positions. Open interest is 9,116. Meanwhile, implied volatility has moved up to 90, from about 88 the day before.

Implied Volatility Movers

While VIX breaks below 30 and to new 8-month lows, the NASDAQ QQQ Volatility Index (.QQV) is also under pressure. VIX measures the expected volatility priced into S&P 500 Index options. QQV tracks expected volatility of QQQQ options and is down 1.17 to 26.89, or its lowest levels since mid-September. By way of comparison, QQV hit an extreme 123 in mid-November.

Implied volatility is also lower in H-P (HPQ), Home Depot (HD), and PNC (PNC). Meanwhile, implied volatility is higher in Ann Taylor (ANN), OSI Pharmaceuticals (OSIP), and GM (GM).