Thursday Options Recap

by: Frederic Ruffy


Stocks are broadly higher after European markets rallied on strong economic data and the domestic news included strong earnings and better-than-expected existing home sales numbers. Stock index futures rallied along with European markets after data showed purchasing managers index increasing 56.7 in July from 56.0 in June, instead of falling to 55.2 as economists had expected. Separate data showed industrial orders up 3.8 percent, and much better than expectations of 0 percent. The major averages opened higher in the US despite weak jobless claims numbers (increasing by 37,000 to 464,000 in the week ended July 17. Economists were predicting a smaller increase of 18,000) and the rally gathered additional momentum after the latest existing home sales report showed a decline to an annual rate of 5.37 million in June, and not as bad as the 5.09 million that economists were expecting. Meanwhile, strong earnings from a number of widely helds, including UPS, Caterpillar (NYSE:CAT), and Qualcomm (NASDAQ:QCOM), is also helping to support higher stock prices. The Dow Jones Industrial Average is up 224 heading into the final hour. The CBOE Volatility Index (.VIX) lost 1.28 to 24.36. Trading in the options market is active, with about 6.3 million calls and 4.9 million puts traded so far.

Bullish Flow

Xerox (NYSE:XRX) shares gapped higher and are up 67 cents to $9.08 after the company reported a 24-cent per share second quarter profit, which was 3 pennies better than Street estimates. XRX also raised guidance for the full year. Directional sentiment in the options market seems to reflect some bullishness as well. 10,390 Jan 9 calls traded (99 percent Ask). Another 4238 Jan $10 calls traded (60 percent Ask). Implied volatility is down about 7 percent to 34, as shares rally and move to their best levels in nearly one month.

A massive buy-write was initiated in the Select Sector Financials (NYSEARCA:XLF) early Thursday after an investor sold 30K Dec 15 calls at 76 cents and bought 3 million shares at $14.33. Shares are up 28 cents to $14.43 and implied volatility down about 3 percent to 33 (compared to a 52-week high and low of 53 and 21.5.)

Bearish Flow

Gerdau Ameristeel (GNA) adds 2 cents to $10.97 and order flow is bearish for the third time in four trading sessions. On July 19 and yesterday, the focus was on September 10 puts. Open interest increased by 4,200 following Monday’s action and by another 4000 since yesterday. At 21,299 contracts, the Sep 10 put now has the most open interest in the name. Today, the focus is on the Mar 10 puts, which have traded 4100X including multiple lots at the 5-cent ask price. Looks like opening put buyers. This stock rallied on June 1 on news Gerdau SA is acquiring the company. Shares have been trading in a range since and the interest in GNA puts is likely hedging around the deal. Implied volatility is down 20 percent to 23.5 today.

Implied Volatility Mover

Cephalon (NASDAQ:CEPH), which moved higher yesterday after the company raised its second quarter earnings guidance, is down $1.21 to $59.83 on news the European Medicines Agency has recommended restricting the use of Provigil. Players are jockeying for the stock’s next move, with, for example, active trading seen in Aug 55 puts and 80 calls ahead of July 27 (after market) earnings. Implied volatility is up 9 percent to 34.