Wednesday Options Recap

Sentiment

Stocks are trading broadly lower after a second day of weak economic data and falling commodities prices conspired to weigh on investor sentiment Wednesday. The day after a report on July consumer confidence fell short of economist projections, a report released before the bell showed orders for durable goods falling 2.5 percent in June, well below expectations for a .6 percent decline.

Meanwhile, falling commodity prices seemed to add to the worries about the global economic outlook. Crude oil is reeling, down $4.32 to $62.91 a barrel. Meanwhile, gold fell another $11.20 to $930.50 an ounce.

The Federal Reserve's latest Beige Book didn't help much. While there were some glimmers of optimism, the Fed noted that,

"Looking ahead, there tended to be a general sense of optimism about the near-term outlook, though contacts in a number of Districts expressed concern about the risk that declining equity markets would affect the real economy."

The equity market is indeed declining Wednesday. The Dow Jones Industrial Average is down 65 points heading into the final 45 minutes of trading. The CBOE Volatility Index (.VIX) is up 1.15 to 26.16. Trading in the options market is running about the typical pace, with 5.4 million puts and 5.7 million calls traded, a ratio of .95 (compared to a 22-day average of .84).

Bullish Flow

Novavax (NVAX) saw a spike in morning trading and was recently up 51 cents to $4.77 (52-week high) on heavy volume. Options activity is heating up as well. Total volume is running 2X the average daily, with 5,300 calls and only 90 puts traded (chart). Aug and Sep 7.5s are the most actives, as some players buy premium in anticipation of additional upside.

The US Oil Fund (USO) is down $2.34 to $33.42 after two days of weak economic data and bearish weekly inventory data conspired to send crude oil reeling–down $4.43 to $62.80 a barrel Wednesday. In the options market, a noteworthy trade surfaced in USO late in the day after a player bought 100,000 Jan2010 calls at the 55 strike for 25 cents.

Bearish Flow

The top equity options trade Wednesday appears to be a bearish bet on SLM Corp. (SLM). Shares are down 10 cents to $8.77 and a block of 35,800 January 2011 $2.5 puts traded for 45 cents. It was bought, according to an exchange-floor contact, and looks like a new position. If so, it is probably "disaster insurance" because the stock is down 10 cents to $8.77 and the put is 71.5 percent out-of-the-money. Interestingly, it comes the day after SLM saw bullish order flow, including large buyers of Sept 10 calls Tuesday. The company reported earnings last week.

Implied Volatility Movers

Yahoo (YHOO) shares are down $2, or 11.6 percent, to $15.22, as investors expressed disappointment with the company's new partnership with Microsoft (MSFT). Trading in the options market is brisk, with almost 400,000 YHOO contracts traded on the session. Meanwhile, implied volatility is falling to a new 52-week low of 40, down from 49 the day before, now that this "event risk" has passed.

Implied volatility is also lower in Western Digital (WDC), Hess (HES) and General Dynamics (GD). Meanwhile, implied volatility is higher in Goodyear Tire (GT), New York Community Bancorp (NYB), and PNC (PNC).