Thursday Options Recap

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 |  Includes: AIG, DAL, NVDA, PALM, PEP, S, SLB, STI, T
by: Frederic Ruffy

Sentiment

The major averages overcame early weakness and are trading higher late Thursday. With little earnings news to guide the morning action, the early focus remained on trading in Europe, where at a summit Thursday, European Council President Van Rompuy vowed that Europe's leading governments will offer "determined and coordinated action if needed" to preserve stability in Greek credit markets. However, Rompuy failed to offer any concrete details, and trading was sluggish in Europe before the exchanges opened in New York.

Meanwhile, the latest weekly jobless claims gave reason for modest optimism after the data showed filings for jobless benefits falling by 43,000 to 440,000 in the first week of February. Economists were looking for a much smaller 18,000 decline.

Yet the news didn't trigger much reaction. Instead, the Dow Jones Industrial Average traded lower early, before rebounding mid-morning with help from the cyclicals like Alcoa (NYSE:AA), 3M (NYSE:MMM), and Caterpillar (NYSE:CAT). Twenty-eight of the Dow thirty are higher and the industrial average is up 110 points. With about 45 minutes left to trade, the CBOE Volatility Index (.VIX) is down 1.27 to 24.13. Trading in the options market remains somewhat defensive. Approximately 5.3 million puts and 5.6 million calls traded so far. (Note: There will be no recap Friday or Tuesday, as I will be traveling to teach a workshop at the NY Expo. I hope to see some of you there!)

Bullish Flow

AT&T (NYSE:T) is up 14 cents to $25.26 and one player sells 14617 Jan11 25 calls at $1.82. It was tied to shares at $24.99 (on a 50 delta) and might close an existing position, as open interest is 68,540 and the most of any AT&T options contract. Or, this might be an opening buy-write strategy using at-the-money calls. Shares traded at $24.99 and the strike price is $25. So, these calls are at-the-money.

Recall that, in most buy-writes or covered call strategies, the strategist is selling 1 call for every 100 shares. In this case, excluding commissions, the investor pays $25 per share and collects about $1.80 in premium. The cost basis falls to 25 - 1.80, or $23.20, which becomes the downside breakeven. The upside is limited by the strike price, or $25, through the Jan11 expiration. If shares are above $25 at expiration, the calls will be assigned and the investor sells the stock at $25. Since the calls are at-the-money, the profit from this buy-write if shares settle above the strike is equal to the premium received, or $1.80 (7.8 percent).

Bearish Flow

SunTrust (NYSE:STI) is down 45 cents to $22.54 and noteworthy morning trades include 4000 Apr 18 - 22 put spreads. Looks like a buyer paying $1.10 to open a new position and possibly hedge a position in the regional bank. No recent headlines on STI. Earnings expected late April, probably falling outside the April expiration.

Implied Volatility Movers

Palm (PALM) is down 2 cents to $9.59 and options are busy after two sources (the Boy Genius Report and OTR Global Taiwan) reported PALM has halted production of Pre and Pre+. Shares traded higher early, hitting $10.09, after Citi raised the stock to Hold from Sell. However, the production halt news trigggered a volatile reaction and shares hit a low of $9.25 on heavy volume. In the options market, 39K calls and 44K puts traded so far. Recent trades include 1000 Feb 7.5 - 11 strangles at 23 cents, perhaps a closing trade or a cheap bet the volatility will continue through next week's expiration. Implied volatility jumped about 23 percent to about 90.

Unusual Volume Movers

Sprint Nextel (NYSE:S) is seeing 6X average daily trading volume, with 201,000 contracts traded and put volume representing about 61 percent of today's activity.

AIG (NYSE:AIG) is seeing 2X average trading volume, with 93,000 contracts traded and calls representing 68 percent of today's trading activity.

Pepsico (NYSE:PEP) is seeing 3X normal trading volume. 59,000 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 Schlumberger (NYSE:SLB), NVidia (NASDAQ:NVDA), and Delta Airlines (NYSE:DAL).

[SA Editors update: False alarm report on PALM rumors here]