Friday Options Recap

Sentiment

Stocks opened lower on disappointing jobs data, but trading has since turned mixed late Friday. The Dow Jones Industrial Average opened lower and extended recent losses on news the US economy lost 263,000 jobs during the month of September. The decline follows a 201,000 loss in August (revised from 216K) and was much worse than the 175,000 drop economists had predicted.

The Labor Department also said that average hourly earnings rose just .1 percent and the average workweek was 33 hours. Economists were expecting an increase of .2 percent and a 33.1 hour workweek. As expected, the unemployment rate edged up to 9.8 percent from 9.7 percent.

Yet, while the Dow opened lower, the selling never really gathered any momentum -- perhaps because two days of bleak economic data and a 2 percent drop in the Dow Thursday had discounted bad employment numbers. ADP's private sector report Wednesday showed the US economy losing 254,000 jobs and the Labor Department reported Thursday a 17K jump in weekly jobless claims.

Consequently, the major averages are holding steady despite a third day of poor jobs numbers. The Dow Jones Industrial Average is up 4 points and the NASDAQ is flat heading into the final hour. Trading in the options market is active and remains defensive, with approximately 6.90 million puts and 6.15 million calls traded so far (a ratio of 1.12, compared to a 22-day average of .79).

Bullish Flow

AK Steel (AKS), which is down 17 cents to $18.17 and off 22.4 percent in a little over two weeks, is seeing some call buying Friday. 9,175 contracts traded, which represents 3X the expected and 4.5X the number of puts. Oct 20 and Nov 21 calls are the most actives and, while a lot of the trades hit mid-market, ISEE indicate that 3,660 AKS calls (or 88 percent of the volume on the ISE) were bought to open Friday. AK Steel announced plans to add a surge charge of $210 per ton on electric steel prices shipped in November 2009 — but it isn't clear whether the call buying is related to the news because the share price certainly didn't react.

Career Education (CECO) is up 23 cents to $23.94 and options volume is running 11X the usual on increasing interest in the Apr10 $22 buy-write (buying shares and selling calls). 6000 recently traded for $3.90 against shares at $23.90 ($2 over). 8,900 traded total vs. open interest of 14 contracts. Average implied volatility in CECO is around 45 (-.8), compared to a 52-week high and low of 100 and 36.6.

Bearish Flow

A massive spread traded in the iShares Small Cap Fund (IWM) Jan 2011 puts Friday. An investor bought 35,000 of the 58s, sold 70,000 Jan 45s, to create a 1X2 put ratio spread for $1.15. It's possibly a hedge or straight bearish bet and would need the small cap fund to fall to $45, or 23 percent from its current levels of $58.42, to achieve the spread's max profitability by Jan 2011.

Implied Volatility Movers

The CBOE Volatility Index (.VIX) is down .15 to 28.12 midday, despite another day of losses for the S&P 500, which is down 3 points. VIX is easing now that the employment report is out and this week's other event risk has passed. The Volatility Index hit a high of 29.56 Friday morning and its best levels in exactly one month. On Sep 2, VIX hit 29.57, which coincided with a short-term bottom for the S&P 500. The S&P 500 had suffered a four-day 3.5% slide and then reversed direction beginning Sep 3. By way of comparison, the S&P 500 has suffered an 8-day 4.4 percent loss in the latest pullback.