Wednesday Options Recap: Trading on Caution

by: Frederic Ruffy


Stocks traded broadly higher, but the tone of trading turned cautious and the market action is mixed late Wednesday. A modest rebound in the Euro and gains in Europe’s equity markets helped set the table for morning gains on Wall Street. Germany’s DAX paced the advance with a 2.1 percent gain. Attention then shifted to Fed Chairman Ben Bernanke’s testimony to Congress at 10:00. The head of the US Central Bank said the economic recovery is intact despite the problems in Europe’s debt markets. The Dow Jones Industrial Average held higher through the commentary and was up triple digits midday. The Fed’s Beige Book, released at 2:00 eastern time, triggered a modest negative reaction after Fed officials noted modest economic improvement across the country, but probably not enough to spur much job growth. A substantial drop in BP shares on solvency concerns and a dip in the euro back below 1.20 against the buck seemed to weigh on afternoon trading as well. Consequently, the Dow is up 14 points and down 110 from its best levels. The CBOE Volatility Index (.VIX) hit a low of 30.23 and was recently down .95 to 32.75. Option action is running about typical levels. With an hour left to trade, about 5.7 million calls and 5.3 million puts traded so far.

Bullish Flow

JP Morgan (NYSE:JPM) shares are off a nickel to $37.73 and some big prints surface Wednesday afternoon after an investor sold 25K Jan 70 calls at an average of 2.5 cents, sold 25K Jun 60 calls at a penny each, and bought 50K Jul 41 calls at 72 cents each. Looks like a roll out of deep out-of-the-money Jun/Jan calls and an opening purchase of July out-of-the-money call options. If so, this strategist is likely taking a loss on the Jun 60s and Jan 70s, but also positioning for a possible move beyond $42 through the July expiration.
Rackspace (NYSE:RAX) is up 57 cents to $16.08 and options volume is 4.5X the average daily, driven by an apparent seller of 7,000 Jul 12.5 puts on the 15-cent bid. There is no existing open interest in the contract. Meanwhile, implied volatility in the San Antonio based Internet software company is down about 4.5 percent to 58.5 and shares are up 6.1 percent after testing a recent support level at $15.15 yesterday. By selling the July 12.5 puts, this strategist is looking for RAX to hold its ground, but is also making a statement that they are willing buyers of the stock at $12.5 through the July expiration.

Bearish Flow

Altria (NYSE:MO) is up 3 cents to $20.23 and a noteworthy options trade Wednesday is a buyer of 30K July 19 puts at 35 cents each. Looks like an opening trade and possibly a short-term hedge. Implied volatility is up 3.5 percent to 29.5. No news on the stock today. Next earnings slated for mid to late July.

Implied Volatility Movers

BP (NYSE:BP) shares have come under pressure and implied volatility is surging after a Fortune story triggered another round of selling in the battered energy company. In the report, Matt Simmons, an oil industry insider, suggested that BP could be bankrupt within a month. Shares are down $4.35 to 30.33 and set new 52-week lows of $30.13. Options volume is 3X the recent average daily, with another 238K puts and 168K calls traded. July 32 and June 30 puts are the most actives. Implied volatility is up 42 percent to 96 and new 52-week highs. Link to story on web site.

Unusual Volume Movers

Pfizer (NYSE:PFE) options volume is running 3X the usual, with 247,000 contracts traded and call activity representing about 94 percent of the activity.

Anadarko Pete (NYSE:APC) options activity is running 3X the usual, with 96,000 contracts traded and call volume representing 70 percent of the volume.

Rambus (NASDAQ:RMBS) options volume is running 5.5X the usual, with 93,000 traded and put volume representing 56 percent of the activity.

Unusual volume is also being seen in Petrobras (NYSE:PBR), Altria (MO), and Ambac (ABK).