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Sentiment

Stock market averages are sporting modest losses following disappointing retail sales numbers Tuesday. According to the Commerce Department, total sales rose for a seventh consecutive month in January. However, at .3 percent, the improvement was a bit less than the .5 percent increase that economists had expected. The stock news is light. NYSE Euronext (NYSE:NYX) is in the spotlight after agreeing to a merger with Deutsche Boerse. Dell Computer (NASDAQ:DELL) is seeing heavy trading ahead of its earnings, due after the closing bell. The Dow Jones Industrial Average has given up 50 points and the NASDAQ is down 10. The CBOE Volatility Index (.VIX) gained .55 to 16.50. Options volume is running about the typical levels. 8.8 million calls and 6 million puts traded so far.

Bullish Flow

The top trade so far today is in Citi (NYSE:C), which is flat at $4.91. A 100,000 contract block of Sep 6 calls traded on the 12 cent bid and was part of a Sep 5.5 – 6 (1X2) call ratio spread at 2 cents (credit). A block of 50,000 Sep 5.5 calls traded at the 22-cent ask price at the same time. In this trade, the strategist is buying 50,000 Sep 5.5s and selling 100,000 Sep 6s. The best pay-off occurs if shares settle at $6 at the September expiration. If so, the Sep 5.5s are worth 50 cents and the $6 calls expire worthless. There’s additional risk to the upside due to the fact that half of the Sep 6 calls are not covered. One way to hedge the risk, is to buy the Sep 6.5s and create a butterfly instead of a ratio spread. But, today’s ratio spread trader is probably not looking a rally much beyond $6, which is already 22.2 percent above current levels.

Gap Stores (NYSE:GPS) jumps $1.38 to $22.85 after a recent filing showed Ed Lambert’s ESL Partners with a 5.8 percent stake in the retailer. Shares are up and one player seems to view the strength as an opportunity to sell Feb 23 calls. A 4000-contract block traded at 18 cents on ISE when the market was 18 to 22 cents. 4,900 now traded (84 percent Bid). Meanwhile, GPS implied volatility is up 3 percent to 31 on the news.

Bearish Flow

MBIA (NYSE:MBI) adds 58 cents to $11.91 and one strategist sells 3,080 Feb 12 puts at 56 cents and 900 Feb 13 puts at $1.49. The same investor also bought 6,250 Mar 10 puts at 49 cents and is probably rolling a position in in-the-money Feb puts to the out-of-the-money Mar 10s. After touching a 52-week high of $14.96 on 1/11/11, MBI came under pressure and had fallen to $10.76 by Feb 3. Since then, however, shares of the Armonk, NY surety and title insurance company have been grinding higher, up in seven of the past eight trading sessions. Implied volatility is up 4 percent and elevated at 83. Earnings expected late-Feb.

Implied Volatility Mover

Spectrum Pharmaceuticals (NASDAQ:SPPI) gapped at the open and is trading up 51 cents to $6.97 on better-than-expected fourth quarter earnings. Options are actively traded as well. 5,860 calls and 380 puts so far. Some players appear to be looking for additional upside in March 7 calls. 1,880 traded (91 percent ask) vs. 487 in open interest. Feb 6, May 6, May 7, and May 8 calls are seeing interest as well. Implied volatility is down 10.5 percent to 50.

Source: Tuesday Options Recap