Tuesday Options Recap

by: Frederic Ruffy


Stocks are trading mixed; as better-than-expected economic data helped ease some of the recent worry about volatility in global equity markets. Stock index futures tracked overseas markets early Tuesday and had fallen deep in the red before the exchanges opened in New York. In Asia, a disappointing report on economic activity in China weighed on investor sentiment. Meanwhile, nervous European investors shed stocks after the euro made a run to levels not seen since April 2006 against the dollar. However, in the US, the major averages battled back from morning losses after the latest ISM Index fell less than expected in May and the latest April Construction Spending report also beat expectations. From that point forward, trading has been somewhat choppy and uneventful. Heading into the final hour, the Dow Jones Industrial Average is up 11 points and the NASDAQ down 6. The CBOE Volatility Index added 1.30 to 33.37. Trading in the options market is lighter than usual, with 4.9 million calls and 4.2 million puts traded so far.

Bullish Flow

Apple Computer (NASDAQ:AAPL) is up $8.73 to $265.62 and seeing relative strength after reporting that it sold 2 million iPad tablets since the product was launched two months ago. Shares are moving to session highs and options volume includes 151K calls along with 67K puts. The top trade of the day is a block of 1630 Jun 300 calls on the 48 cent bid, which looks like an AAPL Jun 290 – 300 – 310 call fly, bought at 47 cents, 815X. Meanwhile, implied volatility in AAPL is up 5.5 percent to 39.

In the call butterfly spread, the strategist is selling June 300 calls for the body of the fly and buying half as many of the 290s and 310s for the wings. As we can see from the graphic, the trade was repeated more than once Tuesday morning. It’s an aggressive play because the body of the fly is almost $35 or 13 percent above current market levels. Therefore, it is relatively cheap at only 47 cents. The upside breakeven is $290.47 and the max pay-off (excluding commissions) is $9.53 if shares settle at $300 at the expiration. The upside breakeven is $309.53. Therefore, the range of profitability is between $290.47 and $309.53, with the debit at risk if shares fail to move beyond $290 or if AAPL settles above $310 at the June expiration (17 days).

Bearish Flow

Mariner Energy (ME), a Houston, TX based oil driller, is down $1.03 to $20.35 and the Aug 12.5 – 17.5 put spread trades at 90 cents, 2000X on AMEX. Looks like a buyer opening a new position and bracing for additional losses in ME during the weeks ahead. It’s probably a play on the Gulf spill and the subsequent decline in drilling activity in the area. Implied volatility is up 7 percent to 76, a new 52-week high for ME.

Implied Volatility Movers

Anadarko Pete (NYSE:APC), which owns 25 percent of the Deepwater Horizon rig that sunk and triggered the Gulf spill, is down $7.94 to $44.40 and implied volatility is rising along with the oil driller’s credit default swaps. 5-year CDS rose by 38 percent to 347 basis points Tuesday amid concerns about an out-of-control oil spill. In the options market, 27K calls and 18K puts traded in APC, or 6X normal for the first two hours. Trading is scattered across June, July, Aug, and Jan puts and calls. Meanwhile, implied volatility is up about 37 percent to 70 and a new 52-week high. (Posted at 11:35).

Unusual Volume Movers

BP (NYSE:BP) options volume is running 3X the usual, with 350,000 contracts traded and call activity representing about 56 percent of the activity.

Halliburton (NYSE:HAL) options activity is running 2X the usual, with 121,000 contracts traded and call action representing 64 percent of the volume.

Nokia (NYSE:NOK) options volume is running 2.5X the usual, with 51,000 contracts traded and call activity representing about 84 percent of the activity.

Unusual volume is also being seen in Frontier Communications (NYSE:FTR), Newell Rubbermaid (NYSE:NWL), Tennet Healthcare (NYSE:THC).