Wednesday Options Recap

Sentiment

The bearish funk continues Wednesday. The S&P 500 is down for a sixth time in seven days, as the economic and earnings news failed to spur any buying interest in the equity market. A number of companies, including SAP (SAP), Conoco Philips (COP), and Etrade (ETFC) slipped on earnings news early in the day.

Meanwhile, energy, metals and mining names are mostly lower after crude oil lost $2.08 to $77.47 a barrel and gold gave up $6 to $1029.40 an ounce.

The day's economic news showed orders for durable goods increasing by 1 percent in September, which was in-line with Street estimates; but separate data on new home sales showed an unexpected decline. Sales of new homes fell to an annual rate of 404,000 last month. Economists were expecting the report to show an increase of 17,000 to 440,000.

In the end, the day's news didn't offer much fodder for the bulls and risk perceptions are on the rise, as the market slide continues. The S&P 500 is down 15 points heading into the final hour and the CBOE Volatility Index (.VIX) added 1.95 to 26.78. Meanwhile, trading in the options market is clearly more defensive, with 7.7 million puts and 7.3 million calls changing hands so far (a ratio of 1.06, compared to a 22-day average of .79.)

Bullish Flow

E*Trade Financial (ETFC) is lower after the online broker reported a third quarter loss of a nickel per share, which was a penny better than analyst estimates. Revenues totaled $575 million, down from $602 million in the second quarter. Some investors were probably looking for better news, as shares are under pressure and a flurry of Nov 2 calls were sold in morning action.

The top trade in ETFC hit midday, however, after an investor traded 18,795 Nov 1.5 calls for 15 cents against a position in 902K shares at $1.48. It might be part of a buy-write strategy, where 15 cents was collected to lower the cost basis of owning Etrade shares to $1.33 (1.48 - .15). If so, it leaves upside to $1.5 or 12.8 percent through the November expiration (23 days).

BofA (BAC) is down 20 cents to $15.25 and has now suffered a ten-day 18 percent slide. One player seems to view the decline as an opportunity. At about 15:00 yesterday, they bought the Nov 16 - 17.5 call spread at 34 cents, 120000X! The spread was bought (bought the 16s for 49 cents while selling the 17.5s at 15 cents) and created new open interest in both contracts. It was an opening trade.

Bearish Flow

Masco (MAS) shares fell 3.9 percent yesterday and are under pressure again today, falling another 6.2 percent to $12.27. Shares have fallen after the home improvement and building products co. reported earnings Monday. Although MAS raised guidance for the full year, third quarter EPS numbers fell short of expectations. A 17 percent decline in sales was worse-than-expected as well. In the options market, trading in MAS puts is brisk today. One player bought 5000 Dec 10 puts for 23 cents each. Jan10 10 and Dec 12.5 puts are seeing interest as well.

Implied Volatility Movers

Genworth (GNW) hit a low of $8.37 this morning ahead of earnings. The Richmond, VA life insurance co. is due to release tomorrow after market and there have been two days of active trading in GNW options leading up to the news. Put buyers dominated the action yesterday. Today, 41K calls and 17K puts traded. Meanwhile, average implied volatility has shot up to 102.9 percent, from 91.2 yesterday and 80.6 two days ago.

Implied volatility is also higher in Masco (MAS), BofA (BAC), and Eastman Kodak (EK). Meanwhile, implied volatility is lower in Etrade (ETFC), Sprint (S), and SAP.