Tuesday Options Recap

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 |  Includes: APOL, KWK, MRK, PFE, RMBS, XLV
by: Frederic Ruffy

Sentiment

The major averages are holding solid gains on a relatively light news day Tuesday. With no economic data to guide the early action, Citigroup (NYSE:C) was in the spotlight after the bank announced an impressive $7.6 billion quarterly loss for the latest period. Shares slipped to $3.29 in early trading, but have since battled back and are up 12 cents to $3.54.

Kraft (KFT) is down 1.3 percent and the biggest loser in the Dow Jones Industrial Average after the company sweetened its bid for UK's Cadbury (CBY) to $19.5 billion, a move that won support from the chocolate producer. CBY gained nearly 4 percent. Meanwhile, IBM is up 1 percent and holding modest gains ahead of earnings, due out after the closing bell.

In all, twenty-six Dow stocks are higher and the industrial average is up 100 points heading into the final hour of trading. The NASDAQ added 28. After spiking Friday, the CBOE Volatility Index (.VIX) has eased back to 17.70 (-.21). Trading in the options market is active, with 5.3 million puts and 7.7 million calls traded (a ratio of .69, compared to a 22-day average of .64.)

Bullish Flow

Select Sector Healthcare Fund (NYSEARCA:XLV) hit a new 52-week high and was recently up 68 cents to $32.90 on a good day for the sector. Merck (NYSE:MRK) and Pfizer (NYSE:PFE) are the best gainers in the Dow, up 2.8 and 2.2 percent respectively. In the options, volume in XLV is 7X the average daily. 62K calls and 9390 puts traded. Today's action includes 14K Mar 24 calls bought at 35 cents each and looks like opening buyer. More than 24K traded vs. 204 in open interest.

Apollo Group (NASDAQ:APOL) is down $1.20 to $59.17 amid relative weakness in the education stocks (ESI, COCO, DV, CECO). However, APOL options saw noteworthy trading activity late Friday when a strategist bought-to-open large blocks of August and Jan 2011 call options. According to a floor contract, they bought 7000 Aug 70s, 10K Aug 75s, 13K Jan 80s, and 17.5K Jan 85s — all tied to 1.315 mln shares at $60.082. The combined activity created 51K contracts of new open interest in APOL call options. According to Option Hawk's Joe Kunkle, "The bullish bets [in APOL] could be looking for an eventual takeover, a change in legislation, or an end to the companies legal issues with accounting methods."

Bearish Flow

Quicksilver (NYSE:KWK) is down 10 cents to $15.53 and sentiment towards the Fort Worth, TX oil driller seems somewhat cautious, with 11K puts and 2665 calls traded Tuesday. The top trade is 5000 Feb 15 puts bought at 65 cents per contract on AMEX, according to an exchange-floor contact. It was tied to shares, probably a block of 150K at $15.50. Another 4135 Feb 14 and 1249 Mar 14 puts also traded. Implied volatility edging up to 47, from about 44.2 late Friday.

Implied Volatility Movers

Rambus (NASDAQ:RMBS) saw a morning spike, to $21.66, on heavy volume amid market chatter about a legal settlement. However, the early advance didn't last and RMBS is now extending the losses suffered last week, when shares tumbled on news the company's $4.3 bln memory chip trial was being delayed. RMBS is down 6 cents to $20.71 and 14K calls traded today. Front month calls with strike prices ranging from 21 to 35 are seeing the bulk of the flow and, while there was some evidence of premium buying early, looks like an increasing percentage of today's action in RMBS calls is now trading on the bid. Implied volatility in the Feb 22.5 and 25 calls, today's most actives, is down about 2 percent to 85.