Friday Options Recap

Sentiment

Stocks are trading mixed late Friday, with disappointing earnings reports from Microsoft (MSFT) and Amazon.com (AMZN) weighing on the tech-heavy NASDAQ. While MSFT and AMZN reported EPS numbers that met Street estimates, both posted revenues that fell short of expectations and the news was enough to snap the NASDAQ's 12-day winning streak. The NAZ is down 13 points heading into the final 90 minutes of trading.

Beyond that, trading can be characterized as mixed, which is not unusual during the peak period for corporate earnings. 288 S&P 500 stocks are higher, 203 are lower, and the S&P 500 is little changed late Friday.

The only economic stat of the day -- the University of Michigan Consumer Sentiment Index -- failed to stir much of a reaction in the financial markets. The index rose to 66 in late July, up from an initial reading of 64.6 and better than the 65 economists had predicted.

In the options market, volume and volatility are slowing heading into the weekend. The CBOE Volatility Index (.VIX) is down .14 to 23.29. Trading in the options market is on the light side, with 4.7 million puts and 4.8 million calls traded, a ratio of .98 (compared to a 22-day average of .84).

Bullish Flow

Qwest Communications (Q) is down 7 cents to $3.97 and options volume is running 2X the average daily ahead of a July 29 (before market) earnings release. Most of the action is in the January (2010) calls at the $5 strike and was part of a buy-write.

Recall that, in a "buy-write", the investor normally sells 1 call for every 100 shares. In this case, the strategist sold Qwest call options for 20 cents against shares at $3.94. Since the multiplier for an equity options contract is 100, the sale of the call reduces the cost of owning Q shares to $3.74 (excluding commissions), which is now the downside breakeven or the risk of owning Q. Meanwhile, the upside through the January options expiration becomes limited by the strike price of the call, or $5. If Q is trading above $5 at expiration, the calls will be assigned and the investor must give up the stock for $5 per share and a 33.7 percent profit. Importantly, however, the trade can be closed or adjusted at any time prior to expiration.

Bearish Flow

Capital One (COF) is down a nickel to $27.78 after reporting a quarterly loss of 65 cents per share and 8 cents better than Street estimates of 73 cent loss. Investors might be more focused on the 6 percent increase in charge offs. American Express (AXP) is also lower today after the company reported a 48 percent drop in profits on increasing charge-offs. The bearish sentiment is being reflected in the options market, with one investor paying $3.85 per contract for 12,000 COF Sep 29 puts early. 16,700 contracts now traded. Looks like buyers of COF September 25 puts as well.

Implied Volatility Movers

Some of the homebuilders are seeing higher implied volatility amid active put buying Friday. Centex (CTX) is one of them. Shares are up a dime to $9.48 and 21,000 puts traded, compared to 390 calls. Implied vols moved up to 62, from about 58 the day before.

Implied volatility is also higher in Toll Brothers (TOL), Pulte Homes (PHM), and DR Horton (DHI). Meanwhile, implied volatility is lower in Microsoft (MSFT), Amazon.com (AMZN), and Interactive Brokers (IBKR).

Comments

[marketman54:]

Why do these financials keep improving? Credit card delinquencies are increasing, auto payment delinquencies are increasing, foreclosures are increasing......

They still have a backlog of toxic assets and the commercial real estate failures are rolling down the street.

Yeah, the financials look good.

Jul 26 07:47 AM