Wednesday Options Recap

 |  Includes: DVMT, EWJ, FRX, HL, JPM, XLK, ZION
by: Frederic Ruffy


Stocks are broadly lower in another day of cautious trading. The focus early Wednesday was once again overseas. While the euro made a run back above 1.23, stock market averages in Asia and Europe were broadly lower. Germany's DAX lost 2.7 percent after officials took an independent and hardline stance against short selling. France's CAC 40 and UK's FTSE both fell more than 2.5 percent as well. Meanwhile, the domestic news included a surprise drop in the April Consumer Price Index [CPI], which fell .1 percent (vs. .1 percent consensus). Anxiety levels are also elevated as the Senate prepares to vote on Financial Regulation and the most sweeping changes to Wall Street since the 1930s. Today's vote is to cut off debate and begin voting on the final rules. The Dow Jones Industrial Average is down 80 points ahead of the decision. The NASDAQ lost 21. Trading in the options market is very defensive, with about 7.5 million calls and 9.9 million puts traded so far.

Bullish Flow

Forest Labs (NYSE:FRX) is down 55 cents to $27.12 and the May – June 27.5 call spread is bought at 95 cents, 5990X on CBOE. Looks like a roll of a bullish position from May to June. The company announced a 50 million share repurchase program yesterday. However, FRX is down 16.5 percent since an FDA panel, on April 7, rejected the company's Daxas lung drug proposed along with Nycomed. Daxas is considered key for FRX, as its blockbuster Lexapro faces a 2012 patent expiration. The company might still win approval for a narrower group of patients, possibly before year's end.

Bearish Flow

36.3K May 38 puts trade on JP Morgan (NYSE:JPM) today, or more than 10X the existing open interest in the contract. The top trade is a block of 4607 at 39 cents on the ISE and apparently an opening customer buyer, according to ISEE data. Implied volatility is up about 4 percent to 56, as some players seem to be bracing for short-term volatility in shares ahead of the expiration later this week. However, after hitting a low of $38.52 this morning, shares are up 31 cents to $39.33 — holding modest gains after a 18.4 percent slide since April 16. The bearish trading in the options this morning might be related to FinReg. However, a vote on the Financial Regulation, scheduled for 14:00 ET, has been delayed in the Senate. Vote is now set for 15:15.

Implied Volatility Movers

CBOE Volatility Index (.VIX) is up 4.02 points to 37.57 in morning trading, as the S&P 500 falls 15 points to 1105.80 and tests its 200-day moving average. Stocks opened lower after the latest CPI data showed an unexpected decline of .1 percent in April (vs. .1 percent consensus) and equity markets suffered losses across Europe and Asia. The selling on Wall Street gathered additional momentum after data released at 10:00 a.m. showed 14 percent of mortgages either delinquent or in foreclosure during the first quarter. Stock market averages fell, VIX rallied. Meanwhile, 38K calls and 12K puts traded on the volatility index so far. The top trade is a recent buyer of 2000 Jul 20 puts at 30 cents each.

Unusual Volume Movers

S&P 500 Index (.SPX) options volume is running 2X the usual, with 1.77 mln contracts traded and put activity representing about 73 percent of the activity.

Select Sector Technology Fund (NYSEARCA:XLK) options activity is running 4X the usual, with 64,000 contracts traded and call action representing 97 percent of the volume.

Zions Bancorp (NASDAQ:ZION) options volume is running 3X the usual, with 48,000 traded and put volume representing 58 percent of the activity.

Unusual volume is also being seen in EMC (EMC), Hecla Mining (NYSE:HL), and iShares Japan Fund (NYSEARCA:EWJ).