Wednesday Options Recap

Sentiment

Stocks are trading broadly higher after the Federal Reserve concluded its two-day meeting on monetary policy and the post-meeting statement held no major surprises one way or the other. Trading was cautious Monday and Tuesday ahead of the announcement, as investors awaited to hear if Fed officials were going to change their tone or offer any guidance regarding future monetary policy. Instead, the Fed basically said it expects inflation and the Fed Funds rate to remain low, as the economy continues to grapple with sluggish housing, lost jobs, and declining household wealth.

In other economic news Wednesday, the trade balance deficit widened to $27 billion in June, greater than the -26 billion in May, but not as wide as the -$28.7 billion economists had expected. Crude oil gained 77 cents to $70.22 on weekly inventory data.

Heading into the final hour, the Dow Jones Industrial Average is up 166 points and 13 points from session highs. The CBOE Volatility Index (.VIX) dipped .80 to 25.19 now that "event risk" has passed. Trading in the options market is light, with approximately 4.6 million puts and 5.8 million calls traded so far (a ratio of .80, compared to a 22-day average of .79.)

Bullish Flow

Electronic Arts (ERTS) is up 81 cents to $21.15 and 18K calls traded, or about 6X the expected for midday action. Top trades include 3000 Aug 21 calls at the offer for 60 cents on the CBOE and a multi-exchange sweep of 4,300 Dec 24 calls at the offer for $1.20. Looks like call buyers are driving the volume and implied volatility (average) is up to 41, from about 39.5 yesterday.

Corrections Corp. of America (CXW) is up 30 cents to $20.56 and options volume is running 17X the usual after one player bought 3000 Sep 22.5 calls for 35 cents, 1000 Dec 17.5 calls for $3.70, and 1,200 Dec 22.5 calls for 95 cents.

Bearish Flow

MBIA (MBI) Jan2010/Aug 5 put spread trades 5700X for $1.00 on NYSE. Looks like the same trade as yesterday, when an investor bought the spread 10000X for 90 cents – the same day JP Morgan downgraded the stock to Underweight. Open interest data indicate that both legs yesterday were new positions and today's activity might add to that "timespread".

Implied Volatility Movers

Corn Products (CPO) implied volatility is higher. Shares are down 81 cents to $29.01 and 15,000 calls traded, or about 40X the normal. Implied volatility is moving up to 43, from less than 40 yesterday.

Implied volatility is also higher in Electronic Arts (ERTS), Akamai (AKAM), and ITT Industries (ESI). Meanwhile, implied volatility is lower in Applied Materials (AMAT), Sara Lee (SLE), and Toll Brothers (TOL).