Thursday Options Recap

Sentiment

The major averages opened steady, slid midday, but trading has turned mixed late Thursday. Investors digested another round of economic numbers early in the day. The data included signs of improvement in housing, jobless claims and manufacturing (Philadelphia Fed) activity.

However, after a 108-point gain Wednesday, the Dow Jones Industrial Average struggled to extend the gains despite the better economic news. Instead, perhaps due to the options expiration, volatility picked up a bit in morning action. By midday, the Dow Jones Industrial Average was down 42 points and off 106 from its morning highs.

The selling never gathered any real momentum, however, and the Dow is back in positive territory as we head into the final 45 minutes of trading. The NASDAQ is down 4 points and underperforming after Oracle (ORCL) reported revenues that fell short of analyst estimates. The CBOE Volatility Index (.VIX) is up .03 to 23.72. Trading in the options market is very busy heading into tomorrow's Triple Witch options expiration. Approximately 7.0 million puts and 11.7 million calls traded so far (a ratio of .61, compared to a 22-day average of .82.)

Bullish Flow

At the risk of sounding like a broken record, Dryships (DRYS) calls are busy today. Shares are down 3 cents to $7.45 and 110K contracts traded, compared to 12K puts. Some players are likely closing out Sep 7.5 calls, as 24.8K traded vs. 54.5K of open interest. Meanwhile, Oct 8 calls are the most actives. 29.3K traded and 49 percent traded ask-side. One player bought 8000 for 75 cents in morning action. Another bought 5000 for 55 cents a few moments ago.

CBOE Volatility Index (.VIX) is up .13 to 23.82 and one investor took a substantial position in the VIX Dec 40 calls today. They bought 70000 contracts for 90 cents. They also sold 17500 Dec 22.5 - 27.5 strangles to collect $3.90. This creates a ratio of 4 Dec 40 calls to every 1 short Dec 22.5 - 27.5 strangle (collecting 30 cents on the package) — maybe on the idea a spike in the VIX is possible in the near term and the odds are low that VIX will see a significant decline and/or finish below 22.5 at the Dec expiration.

Bearish Flow

Eastman Kodak (EK) is down 62 cents to $6.02 after the company said late yesterday that it expects to raise $700 mln through financing transactions and said 2009 earnings will be at the lower end of estimates. EK options volume is running 10X the avg. daily, with 142K calls and 85K puts traded. Top trade: a block of Jan11 calls at the 10 line and appears to be a seller collecting $1.25 to open. Apr 6 calls are the most actives, however, with 78.7K traded and 73 percent hitting ask-side. ISEE data is also consistent with buyers. A whopping 42K calls, or 64% of the contracts on the ISE today, are opening customer call buys.

Implied Volatility Movers

CIT (CIT) is down a penny to $1.48 and 8,400 Oct 1 puts traded early Thursday. 63 percent hit ask-side of the bid-ask spread, suggesting buyers were driving the action. Average implied volatility in CIT options is moving: to 237 percent, up from 217 late Wednesday (52-week high and low = 456 and 110).

Implied volatility is also higher in PALM, Wells Fargo (WFC), and Illumina (ILMN). Meanwhile, implied volatility is lower in FedEx (FDX), Oracle (ORCL), and Wellcare (WCG).