Friday Options Recap

Sentiment

Stocks opened steady following a mixed monthly unemployment report and have been able to build modest gains by late Friday. The major averages opened steady after the Labor Department reported that the US economy lost 214,000 jobs during the month of August. The decline follows a 276,000 loss the month before (revised from 247K) and was not quite as bad as the 230,000 decline economists had predicted.

Average hourly earnings rose .3 percent, and more than the .1 percent economists expected, but the rate of unemployed increased to 9.7 percent from 9.4 percent, which was more than expectations of 9.5 percent.

Overall, the report was mixed and there seemed to be a collective sigh of relief that the news wasn't worse. The Dow Jones Industrial Average held steady in morning action and a light volume rally developed midday. With 90 minutes left to trade, the industrial average is up 65 points. Volume is slowing, as many players leave early to enjoy the extended Labor Day weekend. Approximately 4.3 million puts and 4.8 million calls traded so far (a ratio of .89, compared to a 22-day average of .82.)

Bullish Flow

The amount of takeover chatter over the past few days has been an impressive. Some of the speculation stems from the fact that actual mergers have been announced. A Japanese pharmaceutical company is taking out Sepracor (SEPR) and Biogen made a bid for Factset (FACT). The deals seem to have triggered speculation in the healthcare sector, including in Cephalon (CEPH), Cubist (CBST), Elan (ELN), and BioCryst (BCRX). Other possible targets mentioned this week include CREE, HES, RMBS, TIBX, LEAP, BEAT, GERN, ITT, IPI, and POT. While, in most cases, there is very little substance to these "stories", watching them is interesting because it often triggers a real frenzy of activity in the options market!

Meanwhile, heavy trading in Sprint Nextel (S) in Friday. Shares are up a nickel to $3.63 and now almost 50K Oct 4 calls traded. Another 25K Jan 7.5s also traded, bought for an average of 7.5 cents a contract, according to a floor contact. Implied volatility (average) is moving as well, up to 73, from about 61.5 late Thursday.

Bearish Flow

S&P Oil and Gas Exploration and Production Fund (XOP) gained 7 cents to $34.35 and XOP Dec 27 - 34 put spread traded 5000X early in the session, as it appeared that an investor bought the spread 5000X (bought the December 34 puts and sold December 27 puts). The action continued throughout the trading day and the spread has now traded an impressive 26000X, as it appears that at least one investor expects significant weakness in the energy sector between now and mid-December (but the spread might also be to hedge exposure in a long portfolio.).

Implied Volatility Movers

CBOE Volatility Index (.VIX) is down 1.76 to 25.34 and heading to session lows. After some volatility midweek, VIX has seen two days of losses and is up just .58 on the week. The earnings and economic calendars are light in the holiday shortened week ahead and VIX is possibly falling in anticipation of quiet trading in the short-term. Noteworthy trades in the VIX today: 10000 Oct 25 puts bought for 65 cents and a Sep 30 - 32.5 - 35 call "tree", where a strategist bought the lower strike and sold the next two for 15 cents, 1700X.

Comments

[ari5000:]

forgot ENDP

Sep 04 04:57 PM

[The-Stock-M...:]

Good recap, thanks. Being a low volume week, it would be tough to conclude anything based on price action. Maybe it would be mid september before the volumes pick up and return to normal...

Sep 05 01:16 PM