Tuesday's Options Recap

Sentiment

Stocks opened lower after four days of gains, but with no real news to guide the market action, are trading mixed late Tuesday. With no economic data and no earnings of broad market significance, the Dow Jones Industrial Average dipped on profit-taking after a four-day 4.7 percent advance.

However, the selling never gathered any momentum and the industrial average has traded in a narrow 63-point range. With an hour left to trade, the Dow has overcome the early weakness and is up 17 points.

The CBOE Volatility Index (.VIX) hit a morning high of 23.53, but is down .03 to 23.12 and in danger of extending its six-day losing streak. Trading in the options market is running about the usual levels. 4 million puts and 5.3 million calls have changed hands so far (a ratio of .76, compared to a 22-day average of .81).

Bullish Flow

Carter's (CRI) tumbled 23.8 percent on October 27 after the company delayed its quarterly earnings release amid a review of its accounting for margin support to wholesale customers. Shares are down $2.77 to $21.27 today after the company announced that it will restate financials for the fiscal years 2004 through 2008.

Shares are down and options volume is 3X the usual, with 8,155 calls and 2490 puts traded so far. Not everyone is heading for the hills, however. While it appears that sellers are dominating the action in the Nov 22.5 calls, two-sided trading (buying and selling is being seen in the Dec 22.5 calls (today's most actives.) Meanwhile, after spiking to 83 percent on Oct 27, average implied volatility in CRI has eased back to 68.7, down from 69.5 late yesterday.

Bearish Flow

Ambac (ABK) is down 13 cents to $1.05 and puts are seeing heavy trading after rival bond insurer MBIA (MBI) posted a quarterly loss of $730 million late Monday and Ambac released a 10-Q filing that revealed the company faces greater oversight from OCI. According to the filing released late Monday, OCI could decide to initiate delinquency proceedings with respect to Ambac Assurance to protect policyholders. It could result in a $23 billion termination payout. Shares are down on the news and 6860 puts traded so far, which represents 43X the expected for morning trading and compares to 640 calls. Buyers of Feb 1.5 and Nov 2.5 puts are leading the order flow.

Implied Volatility Movers

Melco Crown Entertainment (MPEL) shares are down 78 cents to $4.15 and implied volatility is rallying to 200 (from 157) on a Times of London report that Macau's industry faces a nightmare scenario of water rationing, as reservoirs run dry.

Implied volatility is also higher in Terra Industries (TRA), Ambac (ABK), and Aruba (ARUN). Meanwhile, implied volatility is lower in Sprint Nextel (S), Priceline (PCLN), and Monsanto (MON).