Monday Options Recap

by: Frederic Ruffy


Stocks are trading mixed on a relatively slow news day Monday. The major averages opened modestly lower and once again tracked European benchmarks to the downside. However, the action had turned mixed midday, with strength in the tech sector helping to lift the Nasdaq. Housing related names also showed relative strength on better existing home sales numbers (See Bearish Flow). However, persistent worries about the European Debt Crisis are keeping a lid on any real rally attempts. The industrial average is down 85 points heading into the final hour. The tech-heavy Nasdaq is flat. The CBOE Volatility Index (.VIX) is down 2.89 to 37.21 and trading in the options market is much slower than in recent days. About 6.2 million calls and 5.6 million puts traded so far.

Bullish Flow

Dow component Hewlett Packard (NYSE:HPQ) is off 41 cents to $46.17 and one player collects $2.13 on the Jan 40 put – 60 call “risk reversal”, 8000X. They sold puts at $3.03. The risk reversal was tied to 363K shares at $46.35. 10K now traded in both contracts, but less than existing open interest. So, today’s action might close a bearish reversal. However, it’s interesting to note the same play was initiated 10000X on May 12 to open new positions, at 82 cents. The activity surfaced six days ahead of HP earnings. Shares are down 1.3 percent since those results were reported on May 18. This strategist might view the weakness as an opportunity for a bullish trade, and is selling puts, buying calls as a cheaper way to play the stock.

CBOE Volatility Index (.VIX) is down 3.80 to 36.30 and has given up 9.49 points over the past two days. The move retraces 63.5 percent of the three-day 14.95 point rally that started last Tuesday. In the options market, a noteworthy trade in VIX options is 25K July 60 calls at the $1 ask price. It coincided with 12500 July 45 calls on the $2.60 bid and might be part of a 1X2 call ratio backspread, where a strategist collected 60 cents to sell 45s and buy twice as many 60s. This might close out a ratio spread. If it’s a new position, it’s a play that makes money if 1) VIX settles below 45 at the July expiration or 2) sees a substantial run higher in the weeks ahead.

Bearish Flow

SPDR Homebuilders Trust (NYSEARCA:XHB) is up 7 cents to $16.81 after today's existing home sales showed an increase to an annual rate of 5.77 mln April, up from 5.36 mln in March and better than the 5.65 mln that economists were expecting. In the options market, a noteworthy trade in XHB is a block of 20K Jan 15 puts at the $1.47 Ask price. It was tied to 620K shares at $16.96 and might be a volatility play on the ETF. Implied volatility is down 6 percent to 46 today, down from 52-week highs of 54.5 last week.

Implied Volatility Movers

The top options trades so far today are Citi (NYSE:C) Dec 4 straddles at $1.36, traded on the bid, 30000X on PHLX. It might close an existing position or possibly a bet that Citi will stay within a range around these levels between now and the December expiration. Citi is up 15 cents to $3.91. Implied volatility has fallen about 9.5 percent to 57, down from a multi-month high of 70 last Thursday.

Unusual Volume Movers

Etrade Financial (NASDAQ:ETFC) options volume is running 6X the usual, with 97,000 contracts traded and put activity representing about 62 percent of the activity.

American Axle (NYSE:AXL) options activity is running 8X the usual, with 23,000 contracts traded and call action representing 87 percent of the volume.

Legg Mason (NYSE:LM) options volume is running 5X the usual, with 21,000 options traded and put volume representing 50 percent of the activity.

Unusual volume is also being seen in Focus Media (NASDAQ:FMCN), Elan (NYSE:ELN), and CBS (NYSE:CBS).