Wednesday Options Recap

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 |  Includes: ALKS, BMY, CREE, DAL, DHI, EBAY, HRB, LLY, MS, MU, RGR
by: Frederic Ruffy

Sentiment

Stocks are broadly higher with help from better-than-expected earnings. Upbeat reports from Delta (NYSE:DAL) and AMR (AMR) are helping the transports. Wells Fargo (NYSE:WFC) and Boeing (NYSE:BA) are also up on earnings. Meanwhile, the economic calendar didn’t hold any surprises. The Fed’s Beige Book was released Wednesday afternoon. The text basically said the economy is improving somewhat, but at a slow pace. At the end of the day, it seems that earnings reports are now the main drivers for market action and, with less than an hour left to trade, the Dow Jones Industrial Average is up 144 points. The Nasdaq added 25. The CBOE Volatility Index (.VIX) slipped .80 to 19.83 and trading in the options market is active, with about 7.1 million calls and 5.9 million puts traded so far.

Bullish Flow

Delta Airlines (DAL) gained 80 cents to $12.50 in early trading Wednesday and options volume quickly hit 5X the average daily after the airliner reported a quarterly profit of $1.10 per share, which was 16 cents better than Street estimates. Revenues also topped expectations. Shares are rallying and the top options trade is a buyer of 10K Dec 15 calls at 23 cents each. 11K now traded. Looks opening. Nov 11, 12, and 13 calls are busy as well. Dec 12s are the most active puts. Implied volatility is down 8.5 percent to 44 and falling to new 52-week lows.

Bearish Flow

H&R Block (NYSE:HRB) shares touched a new 52-week low and are off 55 cents to $10.30. Options volume is running at 3X the recent average daily, with 41K puts and 8,360 calls traded on the tax preparation company so far. Recent trades include a buyer of 5000 Nov 8 puts at 32.5 cents per contract. Earlier trades include a spread, in which the investor sold 7000 Jan 12.5 puts at $3 to buy 6,200 Jan 9 puts at $1.25, which appears to be a roll down in strike price. HRB is down 27.1 percent since Oct 12 and the roll might reflect expectations for additional losses in the weeks ahead. Implied volatility is up 3.5 percent to 90 and has more than doubled since Oct 12. The slide in shares started on 10/13 when the company announced plans to buy 2SS Holdings, maker of TAXact. S&P placed HRB rating on CreditWatch Negative this morning.

Implied Volatility Mover

Eli Lilly (NYSE:LLY) implied volatility is moving higher. Shares are down $1.57 to $35.88 after an FDA review of diabetes drug Byodureon concluded that more information was needed. The setback could delay approval until mid-2012, according to media reports. LLY is a partner in the drug with Alkermes (NASDAQ:ALKS) and Amylin Pharmaceuticals (AMLN). ALKS and AMLN are both reeling on the news. LLY, which is due to report earnings tomorrow morning, is down 4.1 percent and implied volatility up 10 percent to 21.5. Sentiment in the options market seems mixed, with 14K calls and 14K puts traded on the drugmaker so far.

Unusual Volume Movers

Bearish activity detected in Sturm Ruger (NYSE:RGR), with 2976 puts trading, or 7x the recent average daily put volume in the name.

Bullish flow detected in Micron Technology (NASDAQ:MU), with 52114 calls trading, or 2x the recent average daily call volume in the name.

Bearish activity detected in D R Horton (NYSE:DHI), with 17514 puts trading, or 4x the recent average daily put volume in the name.

Increasing options volume is also being seen in Cree Research (NASDAQ:CREE), eBay (NASDAQ:EBAY), and Morgan Stanley (NYSE:MS).

(Note: no recap Thursday and Friday due to travel.)