Tuesday's Options Recap

Sentiment

The first trading day of September is a rocky one for the US equity market. The major averages came under pressure in morning trading despite a round of mostly positive economic numbers. For example, the latest ISM Index moved to 52.9 in August, which was up from 48.9 in July and better than economist estimates of 50.5. While July construction spending numbers fell short of expectations (-.3 percent vs. 0 percent consensus), July pending home sales improved (up 3.2 percent vs. 1.5 percent consensus).

Yet, in a sign that a lot of the good economic news might have been baked into the cake during months past, the major averages faltered shortly after the data hit the newswires. The financials are leading the market slide. BofA (BAC), Amex (AXP), and GE (GE) are the biggest losers in the Dow Jones Industrial Average.

29 Dow stocks are lower, only Walmart (WMT) is holding gains, and the industrial average is down 160 points heading into the final 45 minutes of trading. The CBOE Volatility Index (.VIX) jumped 2.40 to 28.41. Trading is brisk, with approximately 7.3 million puts and 7.7 million calls traded so far (a ratio of .94, compared to a 22-day average of .79.)

Bullish Flow

FAZ is back. After weeks of rather quiet trading, the financials faltered Tuesday and the Direxion Financial 3X Bear ETF (FAZ) is up $2.43 to $25.60. Options volume picked up to 2X the average daily, with 42K FAZ calls and 19K puts traded so far. Short-term players are looking for additional upside in Sep calls with strike prices ranging from 22 to 28. Implied volatility in the leveraged fund is up to 108, from about 95 Monday (52 week high and low = 616 and 79).

Pharmaceutical Product Development (PPDI) is off 35 cents to $19.76 and options volume is running 15X the usual on increasing interest in Jan10 22.5 and 25 calls, with 2000 traded (combined) and almost 90 percent hitting ask-side. Implied volatility is approaching 35, from 34 late yesterday. Looks like call buyers are dominating the action and looking for a move higher through the January expiration.

Bearish Flow

Sequenom (SQNM) rallied 21 percent yesterday on talk of favorable data from Brown University independent researchers related to prenatal tests for Down syndrome. However, SQNM is down 93 cents to $5.46 today and given back most of the gains after SignOnSanDiego, a San Diego paper, said the chatter is unfounded. The article quotes a research associate at Brown University, "We've done no study and we're not releasing any interim data in the near future" — link to article on web site. Another 16K calls and 3150 puts traded today. Implied vols are down to 130, from about 147 Monday.

Implied Volatility Movers

CBOE Volatility Index (.VIX) is up 2.57 to 28.58 and making a run to session highs. Some of today's activity in the options market reflects expectations for additional gains in the VIX: 1) One player bought Nov 40 - 50 call (1X2) ratio spreads this morning for 25 cents, 2500X, 2) another bought 8000 Sep 32.5 calls for $1.10, 3) One strategist paid $4.65 for the Oct 30 put - 35 call strangle, 10000X. 4) Finally, not a bullish trade, but the VIX Sep 45 - 50 - 55 call "tree" was sold 6500X (sold 45s, bought other two for even) and likely closed out an exiting position.

Implied volatility is also higher in ZymoGenetics (ZGEN), Wells Fargo (WFC), and AIG. Meanwhile, implied volatility is easing in Novavax (NVAX), Rambus (RMBS), and SINA.

Comments

[fran grady:]

NVAX has good news and is downgraded. I don't get it!

Sep 02 09:25 AM