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Sentiment

Global equity markets are reeling Tuesday, but the sell-off on Wall Street has been orderly thus far. Japan’s Nikkei fell 10.6 percent on worries about the economic impact from last week’s earthquake and tsunami. A deepening crisis at a nuclear plant is fueling grave concern. The Nikkei has now lost nearly 20 percent in less than a week and markets across Asia are falling in sympathy. The volatility spilled over into Europe and, when the opening bell rang on Wall Street, the Dow Jones Industrial Average quickly gave up almost 300 points. However, the situation had stabilized by midday. Then, the Dow was able to find some support from the Fed’s post-FOMC statement, which basically reiterated the same commentary from the previous meeting. With less than an hour to trade, the Dow Jones Industrial Average is down 126 points, but 170 points off session lows. The NASDAQ is down 30. The CBOE Volatility Index (.VIX) hit multi-month highs of 25.66 and was recently up 2.59 to 23.72. Trading in the options market is very busy heading into the expiration and also reflects the uptick in investor anxiety levels. 11.2 million calls and 11.6 million puts traded across all the options exchanges.

Bullish Flow

GM touched a new 52-week low Tuesday morning, but is trading up 2 cents to $31.61, as the US automakers are showing some resilience today. Ford (F) has added 4 cents to $14.35. Meanwhile, in GM options action, a three-way spread traded this morning, as an investor apparently sold 1,000 Jan 25 puts at $1.65 to buy the Jan 35 – 40 call spread at $1.425.

Oil Service HOLDRS (OIH) trades down $2.33 to $154.33 as the sector gets drilled on falling crude oil prices. Crude was recently down $2.07 to $99.12 a barrel and is now a far cry from the levels near $107 seen a little more than one week ago. Meanwhile, in OIH options action, one investor sells the Mar – Apr 160 put spread at $2.80, possibly rolling a bullish position in in-the-money puts to avoid the possibility of assignment before the expiration at the end of this week.

Bearish Flow

ProShares UltraShort S&P 500 (SDS) March calls are seeing interest Tuesday morning. 3900 calls and 575 puts traded on the ETF in the first few minutes. Shares are up $1.11 to $23.12 and the focus is on the Mar 22, 23, 24 and 25 calls. Some investors are likely buying premium on concerns about additional volatility and further losses for the equity market in the days ahead. March options expire at the end of the week. Buying calls on the SDS represents a leveraged and bearish bet on the S&P 500.

Implied Volatility Mover

iShares South Korea Fund (EWY) is down $1.80 to $56.97 and 15000 Mar 54 puts traded at 19 cents and 6000 at 18 cents. Looks buyer-initiated. Volume is now 24,200 vs. 1,509 in open interest. The Mar 54 puts have a delta of -.12 and three trading days of life remaining after today. Some investors might be taking positions on concerns about further fallout in Asia's equity markets in the days ahead. Tokyo's Nikkei fell 10.6 percent Tuesday and is down almost 19 percent since Wednesday. The South Korea fund has lost about 5 percent during that time. Implied volatility in the ETF is up 15 percent to 32 on the week.

Source: Tuesday Options Recap