Tuesday Options Recap

Sentiment

Stocks are trading broadly lower late Tuesday after the latest round of earnings news failed to spark another round of buying interest in the equity market. Better-than-expected results from Apple Computer (AAPL) and Texas Instruments (TXN) helped lift stock index futures late Monday. A number of Dow stocks -- United Technologies (UTX), Pfizer (PFE), and Caterpillar (CAT) -- reported better than expected results Tuesday morning.

However, after a 96-point advance Monday, the Dow Jones Industrial Average failed to extend the gains Tuesday morning. The day's economic data didn't help. A report released before the bell showed housing starts increasing by 3,000 to an annualized rate of 590,000 in September. Economists were looking for an increase to 610,000. Building permits, a better gauge of future activity, fell to 573,000 from 580,000. Economists were expecting 595,000. Meanwhile, the Producer Price Index [PPI] took an unexpected dip in September. After increasing 1.7 percent in August, the gauge of prices on the wholesale level fell .6 percent. Economists were looking for no change in the PPI.

In the end, it seemed that the weak economic data trumped the earnings news and the Dow Jones Industrial Average is down 75 points heading into the final 45 minutes of trading. Boeing (BA), which was cut to Underweight at Morgan Stanley, is down 3.4 percent and the biggest loser in the industrial average. The CBOE Volatility Index (.VIX) is down .17 to 21.32, but trading in the options market is clearly more defensive than in recent days. Approximately 6.5 million puts and 6.9 million calls traded so far (a ratio of .94, compared to a 22-day average of .79).

Bullish Flow

NASDAQ (NDAQ) is up 52 cents to $20.39 and 4,500 Nov 18 calls traded. 77 percent hit ask-side and existing open interest is only 39 contracts. ISEE data (at 91 percent or 2172 contracts) confirm that customers are buying to open NDAQ calls today. Investment Tech reports this afternoon that US Senator Schumer is pushing for greater regulation of those anonymous trading venues known as dark pools. He said in a statement that private markets should "bear their fair share of the costs for maintaining a market infrastructure, now borne disproportionately by exchanges" (such as the NAZ and NYSE.) Meanwhile, implied volatility in NASDAQ options is at 35 (-.4) and falling to new 52-week lows. Earnings expected around Nov 5.

Bearish Flow

iShares Brazil Fund (EWZ) is down $4.63 to $71.72 after markets in Brazil took a hit on news of a transaction tax. Finance Minister Guida Mantega announced that a new IOF Financial Transaction Tax of 2 percent will be imposed on incoming investment in the country's equity assets and fixed income. Brazil's equity market is reeling and, in the US, EWZ is seeing heavy trading. Buyers of Dec 85 calls surfaced early. However, a lot of the action is on the put side of the options chain, with 98K already traded, compared to 51K calls. Meanwhile, implied volatility (average) in EWZ is up, to about 40, from 33.6 late Monday.

Implied Volatility Movers

Apple Computer (AAPL) implied volatility is falling to new 52-week lows. Shares are up 5 percent to $199.50 after the company reported a 47 percent jump in profits on surging iPhone sales. Implied volatility in AAPL options is crashing down below 26, from about 37 yesterday, and below its previous 52-week low of 27.4. These options are cheap!

Implied volatility is also lower in Pfizer (PFE), Caterpillar (CAT), and United Technologies (UTX). Implied volatility is higher in Hershey's (HSY), Career Education (CECO), and Cameco (CCJ).