Monday Options Recap

by: Frederic Ruffy


Weakness in overseas markets set the table for a round of selling on Wall Street Monday morning. Japan's Nikkei traded down 3.1 percent on weak GDP data. Meanwhile, China and other economies that rely heavily on the US consumer for exports, stumbled after economic data late last week showed big unexpected drops in consumer confidence (U of Michigan) and July retail sales.

Home improvement retailer Lowe's (NYSE:LOW) added to the worries about consumer spending. Shares are down $2.36 to $20.47 after the company reported second quarter earnings that missed Street expectations and also guided estimates lower for the third quarter.

The only economic stat released Monday seems to have been largely overlooked. The latest NY Empire State Index rose more than expected. The gauge of regional manufacturing activity jumped to 12.08 in August, up from -.55 the month before and much better than the -.55 economists expected.

The focus seems to be on the consumer, however, and fear is creeping back into the market. The primary worry is that the economy is not out of the woods and the American consumer, which has become an important part of any global economic rebound, is still reeling from lost wealth, rising joblessness, and tighter credit.

Twenty-eight Dow stocks are lower, 2 higher, and, with an hour left to trade, the industrial average is down 170 points. The CBOE Volatility Index (.VIX) jumped 3.32 to 27.59. Trading in the options market is active, with approximately 5.7 million puts and 5.7 million calls traded so far (a ratio of 1.00, compared to a 22-day average of .79.)

Bullish Flow

Some of the managed healthcare names are seeing relative strength and active call volume on talk the Obama administration is favoring a cooperative among insurance companies rather than a government run public health insurance option. United Healthcare (NYSE:UNH) is up 60 cents to $28.66 and options volume is running 3X the normal. 51,000 calls and 4,750 puts traded so far. Wellpoint (WLP) is up $1.24 to $53.43 and options volume is running 2X the normal. 19,000 WLP calls and 4,900 puts traded. Cigna (NYSE:CI) gained $1.06 to $29.88 and nearly 8,000 calls traded, compared to 1,850 puts.

Bearish Flow

Some investors are betting on further short-term weakness in China's equity markets with bullish trades on the ProShares FTSE/Xinhua China 25 Index Fund (NYSEARCA:FXP) Monday. FXP, which moves 2X (200 percent) the inverse to the FTSE/Xinhua Fund (NYSEARCA:FXI), are up 92 cents to $11 and volume is running 2X the usual: 6,300 calls and 1,300 puts traded so far. Buyers of FXP Aug 11 and 12 calls are leading the order flow.

Implied Volatility Movers

The options market is bracing for the historically volatile months of September and October. Ten trading days remain in August and, for that reason perhaps, the CBOE Volatility Index (.VIX) is up 3.28 to 27.55. VIX hit a high of 28.36 and its highest levels since July 13.

Implied volatility is also higher in Wells Fargo (NYSE:WFC) and Crocs (NASDAQ:CROX). Meanwhile, implied volatility is lower in SPSS (SPSS), Clorox (NYSE:CLX), and Valspar (NYSE:VAL).