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Sentiment

Trading was off to a slow start Thursday morning on poor weekly jobless claims data and a disappointing earnings report from Sears Holdings (NASDAQ:SHLD). Before the opening bell on Wall Street, the Labor Department reported that weekly jobless claims increased by 15,000 in the week ended August 15. Stock index futures slipped on the news, as economists were looking for a decline of 11,000. Meanwhile, Sears shares were trading down 12.5 percent after the retailer said it lost 17 cents in the quarter. Analysts were expecting a 35-cent profit.

The major averages found a floor in morning trading with help from better-than-expected manufacturing data. The Philadelphia Fed Survey improved to +4.2 in August, which was significantly better than the -2.0 economists had predicted and a big improvement from the -7.5 seen in July. Meanwhile, AIG is ripping higher and helping the financials after the company's CEO pledged to pay back taxpayer money.

By late-day Thursday, the Dow Jones Industrial Average had traded in a narrow 82 point range and is up 65 points heading into the final forty-five minutes of trading. Trading in the options market is active due to the expiration, with approximately 5.2 million puts and 7.2 million calls traded so far (a ratio of .72, compared to a 22-day average of .82.)

Bullish Flow

Mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE) are moving higher, as financials rally around AIG (NYSE:AIG) news Thursday. FNM is up 17 cents to $1.09 and 23K calls traded, compared to 4,100 puts. Aug and Sep 1 calls are the most actives. Implied volatility in FNM is 132 (-1), compared to a 52-week high and low of 372 and 105. FRE is up 1.22 to $1.54. 9,400 calls traded, compared to 991 puts. Sep 2 and Jan10 2.5 calls are the most actives. Implied volatility in FRE is up to 170 (+17), compared to a 52-week high and low of 390 and 107.

While one spread trader focused on BofA (NYSE:BAC) Jan2011 30 - 35 call spreads this morning, another recently bought 15000 Jan2010 17.5 - 22.5 call spreads for $1.49. Position was tied to shares at $17.10 (33 Delta). BAC is up 36 cents to $17.11.

Bearish Flow

US Natural Gas Fund (NYSEARCA:UNG) fell 39 cents to $11.62 and hit a new 52-week low after bearish inventory data sent natty gas (Sep) down 17.1 cents to $2.948. In the options market, trading in UNG was brisk today, with 160K puts and 116K calls traded. Top trades include 10000 October 12.5 straddles (puts and calls) bought for an average of $2.375 per straddle -- which appears to be a substantial bet that the volatility in natural gas will continue in the months ahead.

Implied Volatility Movers

The CBOE Volatility Index (.VIX) fell and made a run back below 25. VIX is down 1.38 to 24.88 late in the day. Only one economic stat is due out tomorrow--existing home sales--and the earnings calendar is light. Consequently, VIX is falling now that a substantial amount of this week's "event risk" has passed.

Implied volatility is also lower in Sears Holdings (SHLD), Gymboree (NASDAQ:GYMB), and Fannie Mae (FNM). Meanwhile, implied volatility is higher in Sirius Satellite (NASDAQ:SIRI), Freddie Mac (FRE), and AIG.

Source: Thursday Options Recap