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Sentiment

The major averages slipped early and the decline gathered additional momentum midday. Economic news drove the morning action after data showed personal incomes up .4 percent and spending unchanged in April. Economists were looking for a .4 percent increase in incomes and a .3 percent rise in spending.

Attention then turned to the Chicago PMI at 9:45, which showed a decline to 59.7 in May, from 63.8 the month before and below economist estimates of 60. The University of Michigan Sentiment Index showed some improvement to 73.6 for May, up from 73.2 earlier in the month (vs. 73.3 consensus). However, after a 285-point rally Thursday, the Dow struggled on the mixed economic news.

Then, around 12:30 eastern time, volatility picked up another notch after Fitch cut its rating of Spain and the euro sank back to 1.23, down from 1.24 against the dollar earlier in the day. With two hours left to trade, the Dow was down 140 points. Volatility might remain elevated throughout the remainder of the session, as players leave for the three-day Memorial Day weekend and trading gets thin. Meanwhile, volume in the options market is lightening up, with 4.1 million calls and 4.4 million puts traded so far.

Bullish Flow

Baker Hughes (NYSE:BHI) is down $2.68 to $38.41 and falling to multi-month lows after the Obama administration order the halt of deepwater drilling in the Gulf of Mexico. Yet, in the options, bullish flow detected in Baker Hughes, with 9772 calls trading, or 3x the recent avg daily call volume in the name. Jun 40 calls are the most actives. 5,360 traded (94 percent Ask). Another 1093 June 38 calls changed hands (93 percent Ask). Volume exceeds open interest in both contracts and ISEE data (88 percent) is also consistent with opening customer buyers.

eBay (NASDAQ:EBAY) shares are down 72 cents to $21.19 and a noteworthy trade Friday morning is a Oct 19 - 26 bullish risk-reversal, sold at 46 cents (sold puts) against a position in 325K shares at $21.63. Looks like an opening position

Bearish Flow

Alcoa (NYSE:AA) is down 11 cents to $11.71 and morning trades Friday include a seller of 10K Jun 12 calls at 39 cents. It was tied to shares at $11.65 (on a 41 delta). It might be part of an over-write or possibly a liquidation. The contract is 29 cents out-of-the-money with three weeks of life remaining. 15.8K now traded vs. 18K in open interest. Implied volatility in Alcoa is up 2 percent to 49.5 (compared to a 52-week high and low of 76 and 31).

Implied Volatility Movers

Volatility in the euro is once again spilling over into the US equity market. The European currency, which had recaptured the 1.24 handle early Friday, has recently plummeted back to 1.23 against the buck after Fitch downgraded the credit rating of Spain. The news triggered a volatile reaction in the equity market and the CBOE Volatility Index (.VIX) rallied 3.22 points to 32.90 and is at session highs. Noteworthy trades in VIX Friday included June 25 – 35 bullish risk-reversals, which traded at $1.10, $1.20, and $1.30 in morning action. 64K calls and 72K puts traded total.

Unusual Volume Movers

ATP Oil and Gas (ATPG) options volume is running 4X the usual, with 49,000 contracts traded and put activity representing about 70 percent of the activity.

Rambus (NASDAQ:RMBS) options activity is running 2.5X the usual, with 34,000 contracts traded and put action representing 69 percent of the volume.

IShares Japan Fund (NYSEARCA:EWJ) options volume is running 3X the usual, with 32,000 contracts traded and call activity representing about 50 percent of the activity.

Unusual volume is also being seen in Vivus (NASDAQ:VVUS), Noble (NYSE:NE), and American Tower (NYSE:AMT).

Source: Friday Options Recap