Wednesday Options Recap

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Includes: BAC, BIDU, CTIC, INTC, JPM, MON, MRK, MSFT, PBR, PFE, RMBS, YRCW
by: Frederic Ruffy

Sentiment

The major averages opened steady and the early gains were extended in a relatively slow news day Wednesday. With no economic data or important earnings to guide the morning action, the focus was on Capitol Hill -- where the Financial Crisis Inquiry Committee grilled top executives of the major banks about their role in the credit market debacle of 2008. The questions and answers held no major surprises.

Consequently, many of the financials -- including Dow components BofA (NYSE:BAC) and JP Morgan (NYSE:JPM) -- battled back from early weakness and are holding modest gains late in the session. The Dow is up 53 points and not far from session highs. Some of the tech names are battling back from two days of weakness as well and, after falling 30 points Tuesday, the tech-heavy NASDAQ is up 25 points.

With forty-five minutes left to trade, the CBOE Volatility Index (.VIX) is down .32 to 17.93 and off session lows - 17.56 - ahead of retail sales and weekly jobless claims Thursday. Trading in the options market is very busy heading into the expiration later this week, with about 5.7 million puts and 7.3 million calls traded so far (a ratio of .77, compared to a 22-day average of .64.)

Bullish Flow

Merck (NYSE:MRK) hit a new 52-week high and is up $1.51 to $39.06, the best gainer in the Dow Jones Industrial Average, after Credit Suisse upgraded MRK to Outperform from Neutral. They also raised their price target on the stock to $47 from $35, saying that the product story will bring upside, with better visibility over the next 6 to 24 months. Shares are up 4 percent and 41K calls traded. Jan 39 and 40s are the most actives, with two-sided (buying and selling) seen ahead of this week's expiration. Feb 39, Jan12 40, Apr 40, Jan11 40, and Jan 36 calls are seeing interest as well. IV in MRK is down 2 percent to 22.6 percent and probing recent 52-week lows.

Pfizer (NYSE:PFE) shares hit a new 52 week high, now up 42 cents to $19.19, and an investor sells 110K Jan11 $15 calls to buy 85K Jan12 20 calls at $2.12. Looks like a roll from 2011s to 2012s, up in strikes. Shares appear to be benefiting from a Merck upgrade today and this investor might be banking profits on the strength, but adjusting the position to maintain upside exposure to PFE for another year.

Bearish Flow

Monsanto (NYSE:MON) hit a low of $80.5 in volatile trading Wednesday morning. The early volatility in MON comes as the co. hosts its annual R&D pipeline review and Credit Suisse analysts said a strong product pipeline along with collaborative efforts should help MON maintain market share. It's a solid long-term investment, according to CS. However, pricing concerns might limit upside in the near term. But, the early drop in MON might be related to a Huffington Post story which notes, "In a study released by the International Journal of Biological Sciences, analyzing the effects of genetically modified foods on mammalian health, researchers found that agricultural giant Monsanto's genetically modified corn is linked to organ damage in rats."

Implied Volatility Movers

Rambus (NASDAQ:RMBS) shares sank $2 to $21.29 and options volume jumped to 4X the recent average daily, with 72K calls and 49K puts traded so far. Investors are reacting to reports the company's $4.3 billion memory chip trial might be delayed. Judge Kramer said manufacturers are asking for a two-month delay because Micron's (NASDAQ:MU) lawyer has health issues. Kramer set a Jan 21 date to consider the request. Shares are under pressure. Jan puts and calls with strike prices ranging from 21 to 24 are seeing brisk trading -- as some investors are reacting to the volatility in the shares and others are likely closing positions ahead of the expiration. Implied volatility is down 9 percent to 88.

Unusual Volume Movers

Microsoft (NASDAQ:MSFT) is seeing 2X average daily trading volume, with 228,000 contracts traded and call volume representing about 86 percent of today's activity.

YRC Worldwide (NASDAQ:YRCW) is seeing 4X average trading volume, with 223,000 contracts traded and puts representing 58 percent of today's trading activity.

Intel (NASDAQ:INTC) is seeing 2X normal trading volume. 206,000 contracts have traded, with call options representing about 66 percent of today's volume.

Unusual volume (two times or more than normal average volume) is also being seen in Baidu (NASDAQ:BIDU), Petrobras (NYSE:PBR), and Cell Therapeutics (NASDAQ:CTIC).