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Sentiment

Stocks opened higher and are holding gains late-Monday on a relatively slow news day. The focus early was on a round of corporate deal-making. Ensco (NYSE:ESV) is buying Pride Petroleum (NYSE:PDE) and Danaher (NYSE:DHR) made a bid for Beckman Coulter (NYSE:BEC). AOL announced plans to buy news web site The Huffington Post. The earnings calendar is light. Humana (NYSE:HUM) slipped when its earnings were released. Loew’s (NYSE:L) and Lorillard (NYSE:LO) are seeing post-earnings gains. The only economic stat on the docket was the latest report on Consumer Credit, which showed an increase of more than $6 billion in December. Economists were looking for an increase of between $2 and $3 billion. The market showed little reaction to the data. Instead, Monday’s gains on Wall Street appear driven by the day’s merger activity and diminishing fears about problems overseas. With less than an hour to trade, the Dow Jones Industrial Average is up 75 points. The tech-heavy NASDAQ added 14. The CBOE Volatility Index (.VIX) edged up .49 to 16.42. Trading in the options market is active and reflects the bullish underlying sentiment, with 8.6 million calls and 6.6 million puts traded so far.

Bullish Flow

Cisco Systems (NASDAQ:CSCO) is up for a sixth straight trading session, as optimism seems to be building ahead of the networking giant’s earnings, due Wednesday after market. Shares are up 17 cents to $22.21 through midday Monday and have now added 6.2 percent since January 28. Meanwhile, CSCO Mar 23 and Feb 22 calls are today’s most actively traded equity options contracts. The top trade in the March 23 calls, where volume is 36,620, is a block of 5,546 at the 50-cent ask price. Meanwhile, 28,654 Feb 22 calls have traded and the biggest trade is 5000 on the 78-cent bid. Some investors might be selling the spread and rolling (closing in-the-money Feb 22 calls to buy out-of-the-money Mar 23s) ahead of the news. A total of 130,000 calls and 33,000 puts have already traded in Cisco. Implied volatility is flat around 30.

Ford Motor (NYSE:F) adds 46 cents to $16.18 and 4,170 Feb 16 calls were apparently sold at 45 cents to buy the Jun 16 – 20 call spread at $1.16, 4170X. The three-way spread looks like a roll of a bullish position from February to June. Ford shares approached $19 in mid-January, but then came under pressure when earnings were reported on 1/28 and then knocked back down towards $15 after a three day 18 percent loss.

Bearish Flow

iShares Small Cap Fund (NYSEARCA:IWM) touched a new 52-week high and adds 66 cents to $80.53 on the day. Two noteworthy spreads recently traded in the ETF. In one, the strategist bought 50,000 Mar 77 puts and sold 100,000 Mar 73 puts, setting up a 1X2 put ratio spread for a 7-cent net debit. A bit earlier, a Mar 72 - 75 - 78 put fly was bought at 26 cents, 20000X. Both look like downside hedges through the March expiration, with the vertical spread offering a max pay-off if shares fall below $73 (9.4 percent) and the fly bracing for a move towards $75, or 6.9 percent.

Implied Volatility Mover

Brisk trading continues in China MediaExpress (OTCPK:CCME). Shares came under pressure on Friday, Jan 28 and the selling gathered additional momentum last week after Muddy Waters Research alleged that the Chinese advertising company is engaged in a “massive pump and dump scheme.” The stock suffered a five-day 51.4 percent debacle before rebounding 20.5 percent Friday. Shares are down 75 cents to $13.14 today and options volume includes 27000 calls and 31000 puts. Of the total volume, 60.3 percent is in the front-month February options. Feb 14 puts top the most actives, followed by Feb 15 calls. Players are also showing interest in Feb 10, 13 and 15 puts. The overall flow seems to reflect concerns about additional losses in CCME into the Feb expiration (11 days) and implied volatility, which hit a high of 218 during the peak of the panic last week, is up 7 percent to 154 today.

Source: Monday Options Recap