Wednesday Options Recap

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Includes: CNVR, PSCD, SNIC, STAR, XLF, XLI
by: Frederic Ruffy

Sentiment

Major averages have recouped Tuesday’s losses despite a round of mixed economic news Wednesday. After 143-point nosedive yesterday, the Dow Jones Industrial Average opened higher after the Labor Department said that filings for jobless benefits fell by 34,000 to 407,000 last week, which was significantly better than economist estimates of 442,000. A separate report showed personal spending up .5 percent, and .1 percent better than expected. Meanwhile, the University of Michigan Consumer Sentiment Index moved to 71.6 in late-November, from 69.3 earlier this month and better than the 69.3 that economists had predicted. The rest of the day’s economic news wasn’t so bright. Durable Goods orders fell 3.3 percent in October. Economists were looking for a .3 percent drop. Meanwhile, New Home Sales plummeted 8.1 percent in October, which was also significantly worse than projections. Economists were looking for an increase of about 2 percent. Yet, with thin trading ahead of the Thanksgiving holiday, stocks have been able to forge solid gains and the Dow Jones Industrial Average is up 143 points heading into the final hour. The NASDAQ has added 46. The CBOE Volatility Index (.VIX) is down 1.46 to 19.17. Trading is slowing, with 6.1 million calls and 4.3 million puts traded so far.

Bullish Flow

iStar Financial (SFI) adds 23 cents to $5.62 and 2000 July 6 calls were sold at $1.25 each. It was part of an opening buy-write and tied to stock at $5.61 (1.64 over), according to a source on the floor. Shares are up 63.8 percent since the company reported earnings on 10/28 and announced plans to repay $1 billion in debt.

Sonic Solutions (SNIC) is up 37 cents to $9.49 and options volume is 7X the average daily, being driven by a May 10 - 15 call spread at $1.375, 1800X. Looks like a buyer initiated the trade to open a new bullish position. Shares of the Novato, CA business software company took a hit on earnings news earlier this month and are down more than 25 percent since 11/5.

Bearish Flow

Massive blocks of puts trade on a number of exchange-traded funds midday Wednesday. 113,934 Jan 19 puts traded at a penny on the Consumer Discretionary Fund (NYSEARCA:XLY), 113,882 Financial Select Sector (NYSEARCA:XLF) Jan 9 puts at a penny each, and 113,882 Industrials Select Sector Fund (NYSEARCA:XLI) Jan 19 puts, also at a penny per contract. Given that open interest is sufficient to cover in all three contracts, the action looks closing and offsetting positions opened in mid-August. For example, on August 11 of this year, 37,962 XLF Jan 9 puts traded on the 16-cent bid and on August 19, we observed a writer of 57,000 XLI Jan 19 puts at 32 cents per contract. These appear to be very well-timed plays because stocks are broadly higher since then and the S&P 500 has added nearly 14 percent since late-August. Now, this strategist seems willing to pay a penny per contract plus the transaction costs to offset the positions, perhaps looking to free up capital and bank the profit now rather than deal with the risks associated with holding the positions through January 2011.

Implied Volatility Mover

24000 puts have traded in Valueclick (VCLK) so far, which compares to average daily put volume of 400 contracts and today’s call volume of 1,315 contracts. The action is scattered across Dec, Jan and Mar puts with strike prices ranging from 9 to 12.5. Dec 11s are the most actives 4125 traded (64 percent ask). Meanwhile, implied volatility is up 12 percent to 45 on the day. There’s no recent news on the stock and shares have performed well since the company reported earnings on 11/3, up nearly 10 percent since that time.