Thursday Options Recap

Sentiment

Stocks are holding modest gains with help from higher commodities prices and benign economic data Thursday. Stock index futures saw modest gains in pre-market action after data on first quarter productivity showed a 1.6 percent uptick (vs. 1.2 percent consensus) and the latest weekly jobless claims showed a decline of 4,000 to 621,000 last week, which was in-line with economist forecasts.

Rallying commodity prices helped support some of the energy, metal, and mining names. Crude oil is up $2.50 to $68.52 and hit its best levels of 2009 Thursday. Gold gained $13.50 to $979.10. Aluminum company Alcoa (AA) is up 6.5 percent and the best percentage gainer in the industrial average.

However, generally lackluster results from the retail world seemed to keep a lid on the enthusiasm. Target (TGT), the Limited (LTD), and Abercrombie (ANF) are among the losers. Wal-mart (WMT) is one of 12 Dow stocks moving lower. 18 are higher and the Dow is up 50 points heading into the final 45 minutes of trading.

The CBOE Volatility Index (.VIX) made a run below the 30 "psyche" level late in the day, but is down .87 to 30.15 ahead of key monthly jobs data due out Friday. Approximately 4.8 million puts and 5.9 million calls traded, a ratio of .82 (22-day average = .74).

Bullish Flow

Merck (MRK) is down 3.5 percent to $26.62 and the biggest loser in the Dow Jones Industrial Average midday Thursday. It isn't clear why. Nevertheless, shares are down and options activity is running 2X the usual. Despite the share price weakness, the top trades of the day seem to reflect a bullish view on the pharmaceutical co; after an investor bought the October 25 - 29 - 30 call "tree" 5000X for $1.125 (bought 25s, sold the higher strikes). This so-called "tree" has a bullish bias, as the maximum pay-off is offered if MRK settles at $29 per share at the October expiration.

One strategist appears to have a bullish short-term view on iShares Emerging Markets exchange-traded fund (EEM) and bought the June 35 - 36 - 37 call fly 5000X this morning for 12 cents (sold 10K June 36 calls to make the body and bought 5000 35s and 37s for the wings). The call fly is a bullish one, as it has a potential pay-off of 88 cents if EEM settles at $36 or 7.3 percent above current levels.

Bearish Flow

A substantial ratio put spread recently hit the iShares Real Estate ETF (IYR) after a strategist apparently bought 20K Sep 30 puts for $2.40 and sold 40K Sep 25 puts. Paid a dime per 1X2. Looks opening and, if so, a bet IYR will fall towards $25 by September. (Note: similar bearish ratio put spreads surfaced in REIT VNO Sep puts yesterday. IYR is an ETF consisting of 78 REITs and real estate companies.)

iShares Russell 2000 Small Cap (IWM) June (Quarterlys) 45 put is the most active ETF option Thursday. More than 52K traded. The volume includes 50K for 25 and 26 cents on ISE, which appear to have been sold along with the purchase of 25K June 48 calls to create a bearish 1X2 put ratio spread (buying 25K June 48s and selling 50K June 45s for about 6 cents). IWM is up 71 cents to $53.14 and it would take a substantial move lower for the trade to yield a profit before the end of the second quarter. (Might be a roll up in strikes, but data indicate 48s bought-to-open).

Implied Volatility Movers

Star Scientific (STSI) implied volatility is elevated and still rising Thursday. Shares are up 9.5 percent to $5.18 and 32K calls traded on the day, or about 4X normal. The action appears to be in anticipation of a settlement in its patent lawsuit with Reynold's (RAI). A big move is expected when the verdict is in. Implied volatility is now at 245, up from 240 the day before.

Implied volatility is also higher in Abercrombie (ANF), Natural Resource Partners (NRP), and Covanta (CVA). Implied volatility is lower in Target (TGT), JP Morgan (JPM), and Focus Media (FMCN).