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Sentiment

Major averages are modestly higher on a relatively slow news day Wednesday. With no economic data to set the tone for morning trading, the focus was on a round of mixed earnings reports. Target (NYSE:TGT), Chico’s FAS (NYSE:CHS), and Analog Devices (NASDAQ:ADI) are seeing post-earnings strength. However, BJ’s Wholesale (NYSE:BJ) and Deere (NYSE:DE) are seeing post-earnings weakness. Meanwhile, after a bit of volatility at the open, trading has slowed. With less than an hour to trade, the Dow Jones Industrial Average is up 30 points and 106 points off session lows. The NASDAQ added 12. The CBOE Volatility Index (.VIX) is off .54 to 23.79. Options action is running about the typical pace, with 5.6 million calls and 5.2 million puts traded so far.

Bullish Flow

Storage device maker Brocade (NASDAQ:BRCD) sees increasing options action ahead of earnings. Shares are up 21 cents to $5.18 and 24K calls traded so far, which is 3X the norm and compares to less than 2,000 puts. Aug 5 calls are the most actives. Some investors might be closing positions, as 50 percent traded on the bid and the contract is 18 cents in-the-money with 2.5 days of life remaining. However, Oct 5, Jan 5, and Jan 6 calls are trading predominantly at the ask. Sep 5 calls are trading on the bid and Oct 6 calls are seeing two-way action. Meanwhile, implied volatility is up 2 percent to 47 ahead of the results, due after the close. The company last reported on May 20. Shares fell 8.7 percent on the news.

The top two options trades so far today are in Microsoft (NASDAQ:MSFT). 90,000 MSFT Sep 27 calls traded at a dime and 130,000 Sep 28 calls at a nickel. Both blocks traded on the ISE where ISEE sentiment data indicate the Sep 27 calls were bought to open. So, this might be a 9X13 call ratio spread and, with shares down 11 cents to $24.60, it looks like an adjustment to a position opened on July 28 when shares traded around $26. At that time, about 130K Sep 28 calls were bought at 24 cents and 50K Jan12 30 calls sold at $1.975 (see 7/28 color.) Now this strategist is likely taking the loss on the 28s, but opening a new smaller position in the Sep 27s.

Bearish Flow

iShares DJ Real Estate Index ETF (NYSEARCA:IYR) adds 25 cents to $51.83 and one strategist initiates a Sep 45 – 50 put spread at a 78 cent debit, 10000X on PHLX. Open interest is sufficient to cover, but it seems likely that this is an opening play and possibly a short-term hedge or bearish play on REITS/real estate market.

Implied Volatility Mover

Jazz Pharmaceuticals (NASDAQ:JAZZ) is seeing a second day of active trading. Players were active in Aug 10, Aug 12.5, and Sep 12.5 calls yesterday. Today, shares are up $1.32 to $11.57 on news the FDA has issued a staff review of the company’s fibromyalgia drug and headlines indicate the drug is effective. On Friday, the Drug Safety and Risk Management Advisory Committee Meeting and the Arthritis Advisory Committee will discuss the new drug application [NDA] and today’s news bodes well heading into the decision. Consequently, shares are rallying and options are busy for a second day, with some players likely exiting positions in Aug 10 calls, which have traded 1087X (57 percent Bid). Others appear to be initiating bullish positions in Sep 12.5 and 15 calls, perhaps looking for shares to rally on the FDA news Friday. Meanwhile, implied volatiity is down about 12 percent, but remains elevated at 121.

Unusual Volume Movers

Bullish flow detected in American Eagle Outfitters (NYSE:AEO), with 12137 calls trading, or 6x the recent avg daily call volume in the name.

Bearish activity detected in Macy's (NYSE:M), with 8334 puts trading, or 3x the recent avg daily put volume in the name.

Bullish flow detected in Brocade Communications Systems (BRCD), with 22107 calls trading, or 3x the recent avg daily call volume in the name.

Increasing volume is also being seen in Potash (NYSE:POT), Target (TGT), and NetApp (NASDAQ:NTAP).

Source: Wednesday Options Recap