Wednesday Options Recap

by: Frederic Ruffy


Volatility picked up on a busy news day Wednesday. Prior to the start of trading in New York, benchmarks fell across Asia on concerns China will continue to tighten monetary policy. The Shanghai Composite Index lost 2.9 percent and Shenzhen Composite Index tumbled 3.7 percent. Hong Kong's Hang Seng lost 1 percent and Japan's Nikkei finished down 1.8 percent.

In the US, the day's economic data showed Housing Starts falling to an annualized rate of 557,000 in December, down from 580,000 the month before and well below economist estimates of 572,000. Separate data, from the Labor Department, showed the Producer Price Index up .2 percent in December. Economists were expecting no change in the PPI.

Meanwhile, Dow components BofA (NYSE:BAC) and IBM (NYSE:IBM) saw early weakness on earnings news. Although BAC has battled back and is in positive territory late, IBM is off 2.9 percent and the biggest loser in the industrial average. Twenty-six of the Dow thirty are showing losses and the industrial average is down 136 points. With less than an hour left to trade, the NASDAQ is off 35. The CBOE Volatility Index (.VIX) jumped 1.36 to 18.94 amid more defensive trading in the options market. 6.3 million puts and 6.8 million calls traded (a ratio of .92, compared to a 22-day average of .64.)

Bullish Flow

Rambus (NASDAQ:RMBS) is bucking the bearish trend and options trading is brisk after the chipmaker signed a comprehensive agreement with Samsung. Under the plan, Samsung will invest $200 mln. RMBS is up $2.28 to $23.41 and 33K options traded, or 6X the expected for the first hour of trading. The action is scattered, but like yesterday, front month calls with strike prices ranging from 19 to 30 are actively traded. Implied volatility is falling for a second day as well, down 14.4 percent to about 66 (from 87 Friday).

Pfizer (NYSE:PFE) is up 30 cents to $20.30 and more than 10K Feb 20 calls traded early, including a block of 8145 on the bid, 62 cents per contract. Shares of Pfizer are the best gainer in the Dow Wednesday morning after Republicans gained a Senate seat following the Scott Brown victory in Mass., which will make it more difficult for Obama to push through his healthcare reform. Consequently, healthcare stocks are showing relative strength and some players appear to be selling-to-close positions in PFE calls, which had been accumulated in the days leading up to the election.

Bearish Flow

Ford Motor (NYSE:F) is down 22 cents to $11.53 and some investors seem to be taking out some auto insurance in the Jan 2011 puts at the 2.5 line. One player bought 20,000 contracts at 9 cents apiece. Some or all of the activity might be closing, however. 46,265 contracts now traded vs. 142,203 in open interest — the most of any Ford options contract.

Implied Volatility Movers

Starbuck's (NASDAQ:SBUX) implied volatility is moving amid active premium buying ahead of earnings. Recent trades include 1000 SBUX Feb 23 straddles on ISE, which appears to be a buyer as both the puts and calls hit at the ask — a total of $2.07 per straddle. Feb 24 calls, Feb 22 calls, Feb 25 calls, and Feb 22 puts are seeing a lot of today's volume trading at the offer as well. Implied volatility is up 5.3 percent. Meanwhile, a skew between Feb (39 percent) and Mar (35.5) hints at a possible earnings gap move of about $1.50, or 6.5 percent, when SBUX reports after the closing bell.

Unusual Volume Movers

iShares Brazil Fund (NYSEARCA:EWZ) is seeing 2X average daily trading volume, with 328,000 contracts traded and put volume representing about 63 percent of today's activity.

iShares Xinhua China Fund (NYSEARCA:FXI) is seeing 2X average trading volume, with 157,000 contracts traded and puts representing 64 percent of today's trading activity.

IBM is seeing 2X normal trading volume. 92,000 contracts traded, with call options representing about 56 percent of today's volume.

Unusual volume (two times or more than normal average volume) is also being seen in EBAY, NRG, and Starbuck's (SBUX).