Thursday's Options Recap

Sentiment

Stocks are holding modest gains with help from better-than-expected economic data Thursday. A report released before the opening bell on Wall Street showed a long-awaited decline in continuing claims. After 21 consecutive increases, the Labor Department reported that total insurance claims declined by 148,000 to 6.69 million-- the biggest decline in more than seven years.

The Dow Jones Industrial Average opened steady and then moved higher around 10:00 eastern time after the latest Philadelphia Fed Survey showed surprise improvement. The gauge of regional manufacturing activity rose to -2.2 in June, from -22.6 the month before and much better than the -17 economists had predicted. A separate report, released at the same time, showed the list of leading indicators increasing by 1.2 percent in May, which also topped economist forecasts of 1 percent.

Meanwhile, financial-related stocks are helping boost the Dow Jones Industrial Average after Treasury Secretary Tim Geithner appeared before both the House and Senate to discuss the recently-unveiled regulatory overhaul of the financial industry. Geithner didn't color outside the lines and even said he's seeing signs of healing in the sector. BofA (BAC) and JPM are the best gainers in the Dow.

The Industrial Average is up 80 points heading into the final forty-five minutes of trading. The CBOE Volatility Index (.VIX) is down 1.93 to 29.61, as Friday holds no event risk (no earnings or economic data). Trading in the options market is active ahead of the options expiration, with 5.8 million puts and 10.6 million calls trade so far, a ratio of .55 (compared to a 22-day average of .79).

Bullish Flow

iShares FTSE Xinhua China Index Fund (FXI) is an exchange-traded fund that holds 25 H and Red Chip stocks. Red chip shares are Hong Kong incorporated companies while H shares are companies incorporated in the People's Republic of China. One options strategist appears to like the idea. In morning trading Thursday, 20,000 July 38 calls traded for $1.29. These calls were sold against a position in FXI shares, as part of a covered call or buy-write strategy.

In most "buy-writes", the strategist is selling 1 call for every 100 shares and has a moderately bullish view on the stock or exchange-traded fund. In this example, calls were sold for $1.29 against shares for $37.25. Since the multiplier of an options contract is 100, the sale of the calls reduces the cost of owning FXI to $35.96 per share (excluding commissions). $35.96 is now the downside breakeven through the July expiration and if the ETF falls below that level, the covered call will show a loss. On the other hand, if FXI moves higher, the trade becomes profitable. The maximum profit happens if the exchange traded fund closes at $38 or higher at July expiration (29 days). At that point, the shares will be "called away" for $38 and a 5.7 percent profit.

Bearish Flow

Bears have been circling the wagons around Atheros Communications (ATHR). During the month of June, open interest in ATHR puts has increased from less than 11,000 to almost 58,000. A week ago, open interest in ATHR puts was about 20,000. Trades this week include a buyer of 4,000 Sept 15 - 17.5 puts Tuesday–a bearish bet that yields its best profits if ATHR falls to $15 or less. The action continues today, with another 12,000 puts traded, or 9X the typical levels. There is no news to explain the action, but one reader notes that it might be on concerns about Research In Motion's (RIMM) earnings, due out after the close. ATHR is chip supplier to RIMM. Similar bearish trading has been seen in Marvell Tech (MRVL).

Implied Volatility Movers

Luxury goods maker Coach (COH) is down 2 percent to $25.74 and 12,000 puts traded on the day, or about 6X the normal levels. Trading is heavy in June and July 25 puts, as some players look to be rolling positions from June to July ahead of the expiration. Implied volatility is moving up to 56, from about 53 the day before.

Implied volatility is also higher in Atheros Communications (ATHR), Melco Entertainment (MPEL), and Costco (COST). Implied volatility is lower in Discover Financial (DFS) and RIM (RIMM).