Tuesday Options Recap

by: Frederic Ruffy


After an ugly open, the major averages battled back through midday and are sporting modest gains heading into the close. The table was set for early losses on Wall Street after data released early showed Housing Starts falling to annual rate of 549K homes in June, which was down from 574K the month before and below economist estimates of 572K. Meanwhile, a number of widely held names, including IBM, Texas Instruments (NYSE:TXN) and Goldman Sachs (NYSE:GS), slumped on earnings news. However, the morning decline was orderly and buyers had returned by mid-session. There was no fundamental catalyst for the reversal, but the Dow Jones Industrial Average is now up 20 points and 166 from its worse levels. With an hour left to trade, the CBOE Volatility Index (.VIX) is down 1.68 to 24.29. Trading volume is on the light side, with about 5.3 million calls and 4.5 million puts traded so far.

Bullish Flow

Weatherford (NYSE:WFT) is up 96 cents to $16.02 and has staged an impressive 2-day 10.4 percent rally. Today’s move is post-earnings and is being accompanied by a second day of heavy trading in WFT call options (see 7/19 color). Yesterday, the focus was on the August 15 and 16 calls. Open interest in the 15s increased by 15.6K and in the 16s, by 10.4K. Today, some players are likely closing out positions, as both contracts are now in-the-money and have traded more than 12000X each. Aug 17, Jan 15, Aug 18, and Sep 17 calls are seeing interest as well. 41K calls and 11K puts traded on the now Switzerland-headquartered oil driller. Implied volatility has plummeted 14 percent to 41.5.

Nokia (NYSE:NOK) edged up 9 cents to $8.91 and the Jan 2012 7.5 – 12.5 call spread trades at $1.90, 5000X. 7000 now traded. Looks like buyers initiating the trades and opening new positions. Earnings due Thursday, before market.

Bearish Flow

MannKind (NASDAQ:MNKD) gapped higher and is up 61 cents to $6.82 after the FDA said it would review Afrezza, the inhaled insulin product, within six months. The FDA set Dec. 29 as the review date. Shares are up and trading in the options market includes 13K contracts, or about 7X normal for first 30 minutes of trading. 6340 calls and 6245 puts traded so far. While Jan calls are seeing some interest in reaction to the news, Jan – Sep 6 put spreads are the most actives. Some investors appear to be buying the spread at $1.45 and probably looking for shares to hold above $6 through September, but then with the possibility of heightened volatility before January (because the review date is Dec. 29.)

Implied Volatility Mover

Big Print in Citi (NYSE:C) after the Jan 4 straddle trades at $1.01, 20000X on PHLX. Shares are up 2 pennies at $4 and it looks like a seller initiating the trade, perhaps looking for the stock to hold around these levels through yearend. Implied volatility in Citi is around 37 and probing its 52-week lows.

US Natural Gas Fund (NYSEARCA:UNG) is seeing 2.5X the average daily volume, with 174,000 contracts traded and put volume accounting for 76 percent of the action.

Options volume in IBM (NYSE:IBM) is running 2.5X the recent daily average, with 89,000 contracts traded and call volume accounting for 58 percent of the action.

Yahoo (NASDAQ:YHOO) options action is 2X normal, with 65,000 contracts traded and call volume representing 76 percent of the activity.

Increasing volume is also being seen in Radioshack (NYSE:RSH), EMC (EMC), and PepsiCo (NYSE:PEP).