Thursday Options Recap

by: Frederic Ruffy


Stocks opened steady on mixed economic news and are holding modest gains late Thursday. Stock index futures moved higher along with benchmarks in Europe before the opening bell on Wall Street after the Bank of England kept rates at record lows of .5 percent and EuroGroup vowed that Greece would avoid bankruptcy.

In the US, the early focus was on import/export and weekly jobless claims numbers. The Commerce Department reported that strong export sales helped to narrow the trade deficit. Meanwhile, the Labor Department said that weekly jobless claims rose by 17,000 to 474,000 in the period ended December 5. Economists were looking for a decline of about 2,000. However, continuing claims fell to 5157K, down from 5460K and much better than the 5450K average economist forecast.

In the end, the news seemed sufficiently bright to keep a floor under the major averages in morning trading and the Dow Jones Industrial Average was modestly higher midday. Now, with thirty minutes left to trade and not much news to guide the action, the Dow is up 60 and the NASDAQ added 4. The CBOE Volatility Index (.VIX) is down .33 to 22.33. Trading in the options market is running about the normal levels, with approximately 4.8 million puts and 6.7 million calls traded so far (a ratio of .71, compared to a 22-day average of .75.)

Bullish Flow

US Natural Gas Fund (NYSEARCA:UNG) is up 68 cents to $9.79 after natural gas gained 40 cents to $5.30, 11 month highs, on bullish weekly inventory data. In UNG, the exchange-traded fund designed to track natural gas through futures contracts, trading is brisk, with 103K calls and 35K puts traded. Jan10 calls at the $10 strike are the most actives, with more than 30K changing hands so far. The action looks two-sided and might include some over-writing plays, as the top trades hit bid-side and coincided with blocks of UNG shares. Looks like selling for about 48 cents against shares around $9.75.

Inverness Medical Innovations (IMA) is up $1.16 to $42.16 amid strength in the medical supplies names (BAX, BDX, BCR, XRAY, HOLX, IDXX) Thursday. Meanwhile, options volume is 14X the average daily, led by a Jan12 40 - 50 risk reversal, where an investor paid $2.15 to buy puts, sell calls, 5900X. The position was tied to 493K shares at $41.40 and part of a collar strategy.

Bearish Flow

Fuel Systems (NASDAQ:FSYS) is down $5.92 to $44.97 and options volume is running 3X the normal levels. Looks like buyers of Dec 45 puts are looking for additional downside, but with no news to explain the sell off in shares or the interest in FSYS puts. Implied vols (average) are moving up to the mid 60s, up about 16 percent. Today’s weakness comes amid reports Italy will not extend its incentives for natural gas usage. FSYS gets 70 percent of its revs from the country.

Implied Volatility Movers

Eli Lilly (NYSE:LLY) is down $1.37 to $35.19 and implied volatility is higher after the company provided earnings guidance in its latest Investment Community Update, this morning at 8:30 eastern time. 2009 EPS is expected to be in the $4.30 to $4.40 and below the $4.42 average analyst estimate. Shares are down and 30K puts traded so far, which is 35X the typical volume for mid-morning 4X the number of calls. While the top two trades of the day (4500 April 32.5 puts at $1.21 on ISE and 3229 Jan 33 puts at 40 cents on ISE) look like premium sellers, looks like some investors are looking for additional downside in Dec 35 and Jan 36 puts. Implied vols up 6.6 percent to 27.5.

Unusual Volume Movers

Select Sector Technology (NYSEARCA:XLK) is seeing 50X average daily trading volume, with 162,000 contracts traded and call volume representing 99 percent of today’s activity.

Select Sector Consumer Staples (NYSEARCA:XLP) is seeing 19X average trading volume, with 111,000 contracts traded and calls representing 99 percent of today’s trading activity.

Energy Conversion (NASDAQ:ENER) is seeing 7X normal trading volume. 57,000 contracts have traded, with call options representing 77 percent of today’s volume.

Unusual volume (two times or more than normal average volume) is also being seen in Interoil (NYSE:IOC), Merck (NYSE:MRK), and BCE.