Wednesday's Options Recap

Sentiment

Stocks opened the day higher on upbeat earnings and economic news, but trading turned mixed late Wednesday after the Federal Reserve failed to offer soothing words at the conclusion of its Federal Reserve Open Market Committee [FOMC] meeting on interest rates.

Stock index futures moved higher early in the day after a report on Durable Goods showed a surprise increase of 1.8 percent in May, which matched a 1.8 percent increase in April and trounced economist estimates of -.9 percent. Meanwhile, the NASDAQ showed relative strength after tech bellwether Oracle (ORCL) reported better-than-expected earnings and revenues for the most recent quarter.

However, trading turned mixed late in the day after the FOMC concluded its latest meeting on monetary policy and failed to give clear guidance regarding future plans for bond buying or other tools to aid the debt markets. The benchmark ten-year Treasury bond, which was in positive territory early amid hopes for soothing words from the Fed, sank and is down 18/32nd late. The yield on the ten-year, which dipped below 3.6 percent, moved back up to 3.685 percent.

The Dow Jones Industrial Average also gave up early gains and is down 50 points heading into the final 45 minutes of trading. The NASDAQ is up 221 points. Meanwhile, the CBOE Volatility Index (.VIX) is down .93 to 29.65 now that a good deal of this week's "event risk" has passed. Approximately 4.7 million puts along with 5.5 million calls traded so far, a ratio of .86 (compared to a 22-day average of .76).

Bullish Flow

Bullish trading continues in Indianapolis-based healthcare plan provider Wellpoint (WLP). Shares are up 85 cents to $49.68 and 18,000 WLP calls traded, compared to only 495 puts. The top trades of the day seem to reflect a bullish view on the stock after the August 50 - 55 call ratio spread trades 5000 times for 42 cents on the ISE. That is, an investor bought 50,00 August 50 calls while selling 10,000 August 55 calls, creating a bullish spread with a max pay-off if WLP moves up to $55, or 10.7 percent, by the August expiration (58 days.)

Today's bullish flow is part of a trend. Shares are up 8.6 percent since June 12 and heavy call volume has accompanied the move higher (chart). The action has also resulted in a substantial increase in open interest in Wellpoint calls, from about 60K contracts on June 11 to 100K today (chart). The action suggests that investors (smart money) expect the recent bullish run to continue and have been opening new positions in anticipation of the move higher.

Bearish Flow

Expedia (EXPE), which saw a surge in volume yesterday on a negative newsletter mention, is seeing a second day of heavy put activity (chart). Shares slipped Tuesday and more than 21,800 July 15 puts traded after a newsletter recommended investors buy the contract. Interestingly, although put volume surged, open interest increased by only 5,336 to 7,248, suggesting a lot of the activity was opening and closing during the same session. Another 8,000 contracts traded today, but with 65 percent hitting bid-side, it looks like sellers are dominating the action. EXPE is up 47 cents to $15.53 and implied volatility is also up: to 67, from about 65 yesterday and 60 before the frenzy began.

Eastman Kodak (EK) options volume is running 7X the usual. Shares are up a nickel to $2.70 and most of the action is in October 1 puts, after an investor paid 9 cents for 10000 contracts. Looks like an opening put buyer.

Implied Volatility Movers

MGM (MGM) is up 13.7 percent to $6.64 and implied volatility is falling on news its auditor removed "going concern" language from the casino operator's financial statements. A relief rally is sending shares higher and implied volatility eased to 92, from about 96 the day before.

Implied volatility is also lower in Monsanto (MON), ORCL, and American Greetings (AM). Meanwhile, implied volatility is higher in Expedia (EXPE), Sequenom (SQNM), and Sprint (S).