Wednesday Options Recap

by: Frederic Ruffy


The stock market averages have battled back from early losses and are trading mixed late Wednesday. After two days of big gains, the Dow Jones Industrial Average opened a bit lower after Dow component Pfizer (NYSE:PFE) fell on disappointing earnings news. A weak reading on the latest ISM Services Index, which improved to a less-than-expected 50.5 in January (up from 49.8 in December, but below economist estimates of 51.0) also seemed to weigh on morning trading.

However, the tech sector strengthened ahead of Cisco's (NASDAQ:CSCO) earnings (after the bell today) and a better than expected reading from ADP's latest jobs report seemed to help keep a floor under the equity market as well. ADP said that 22,000 private sector jobs were lost in January, which was better than the 30,000 loss economists had predicted. Plus, the report comes two days ahead of key jobs data. Economists expect Friday's report to show the economy adding 13,000 jobs in the first month of 2010.

In the end, the market action turned decidedly mixed. The Dow Jones Industrial Average is down 21 points, but the NASDAQ is holding modest gains. The CBOE Volatility Index (.VIX) edged up .16 to 21.64. Options volume is light, with approximately 4.5 million puts and 5.1 million calls traded (a ratio of .88, compared to a 22-day average of .76.)

Bullish Flow

Big Prints in the iShares Emerging Markets Fund (NYSEARCA:EEM) after an investor pays 67 cents for the Mar 41 - 44 call spread, 70000X. This looks like an opening spread and, with EEM down 21 cents to $39.42, one that pays off if shares rally 5.7 percent or more by the March expiration (44 days).

Big Prints in DR Horton (NYSE:DHI) today after an investor sells the Aug 13 straddle, 12000X. They collected $3.4 to sell both puts and calls. The action comes as shares drift down 31 cents to $12.90, the day after the homebuilder rallied 10.9 percent on earnings. This strategist might now expect shares to hold around these levels in the months ahead and is selling-to-open a new position in the at-the-money August straddle.

Bearish Flow

Bearish activity detected in Maxim Integrated Products (NASDAQ:MXIM), Wednesday, with 5438 puts trading, or 5x the recent average daily put volume. Shares are down 17 cents to $18.17 and the focus is on Feb and May 17.5 puts. Febs are the most actives, with 3321 traded and 89 percent trading at the asking price. The top trade is 1515 at 40 cents on ISE, which might be a closing buyer. Open interest is 5797 and the most of any MXIM options contract.

Implied Volatility Movers

Toyota Motors (NYSE:TM) is off another $5.26 to $72.92 and options volume is 5X the average daily after Bloomberg reports the US recommends that Toyota owners should stop driving recalled vehicles — dealing yet another blow to the Japanese automaker. 20K puts and 8,700 calls traded midday. Feb 70 puts and 80 calls are the most actives and implied volatility is up another 7 percent, to 42, as investors brace for TM's next move.

Unusual Volume Movers

Pfizer (PFE) is seeing 10X average daily trading volume, with 217,000 contracts traded and call volume representing about 79 percent of today's activity.

Oracle (NASDAQ:ORCL) is seeing 3X average trading volume, with 114,000 contracts traded and calls representing 50 percent of today's trading activity.

Cisco (CSCO) is seeing 2X normal trading volume. 231,000 contracts 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 McDonald's (NYSE:MCD), CVS (NYSE:CVS), and Powershares Bullish Dollar Fund (NYSEARCA:UUP).