Wednesday Options Recap

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 |  Includes: AA, BAC, BIDU, EWJ, MMM, UTX, XINGF
by: Frederic Ruffy

Sentiment

Morning trading was sluggish on weak housing data, but stocks caught a bid in afternoon trading and market averages are in positive territory late-Wednesday. A report released Wednesday morning showed New Home Sales at an annual rate of June 250,000 in February, which was down from 301,000 in January and much worse than the 288,000 that economists had predicted. Trading was lackluster on the data into midday, and as crude oil moved beyond $105 a barrel amid escalating unrest in Libya and the Middle East. BofA (NYSE:BAC) also weighed down the Dow Jones Industrial Average after the Federal Reserve rejected the bank’s plans to raise dividends. Yet, with help from cyclical names like Alcoa (NYSE:AA), 3M (NYSE:MMM), and United Technologies (NYSE:UTX), the Dow moved into positive territory in the second half of trading. With 50 minutes remaining, the industrial average is up 81 points. The tech-heavy NASDAQ has added 17. The CBOE Volatility Index (.VIX) lost another 1.38 to 18.83. Trading in the options market is kind of slow, with 7.3 million calls and 6.1 million calls traded so far.

Bullish Flow

Baidu.com (NASDAQ:BIDU) is up 5.2 percent to $133.75, notching new record levels, and leading the NASDAQ 100 higher Wednesday after the company unveiled a new search box plan. The Chinese Internet search provider said it is developing software that lets smartphone and other mobile device users surf and do other things online using a search box on the screen. The initial reaction to the plan was lackluster, but shares have been rallying today and are near session highs. Options volume is more than twice the average daily, with 87000 calls and 48000 puts traded in BIDU. The Weeklys, which expire 3/25, $130 calls and 125 puts are the most actives, with more than 10K traded in each. April 130 and 135 calls are busy as well. While there's a lot of buying and selling on both sides of the options chain, the overall flow seems to reflect some optimism that shares will continue to forge new highs in the days/weeks ahead.

Bearish Flow

iShares Japan Fund (NYSEARCA:EWJ) loses 19 cents to $10.44 and the Jun 10 – 11 bearish risk reversal trades at 14 cents, 15000X. This investor bought the June 10 puts and sold the June 11 calls, according to a source on the exchange floor. It might be an offsetting trade and possibly tied to a block of 708K shares at $10.42. Or, it might be a bet that shares will erase recent gains. EWJ hit a low of $9.24 on March 15 in the wake of the earthquake and tsunami, but then rallied to a high of $10.69 Monday. Shares are down 2.1 percent in the past two days.

BofA saw heavy trading Wednesday morning after the Federal Reserve rejected the bank’s request to hike its dividend in the second half of the year. Shares lost 45 cents to $13.43 and options volume is running 4X more than usual, with 65000 calls and 49000 puts traded in Bank of America in the first hour. April 14 calls are the most actives and possibly seeing some liquidating trades. The contract is now 58 cents out-of-the-money with three and a half weeks of life remaining. 15190 traded (63 percent bid). April 13 puts, April 14 puts, April 15 calls and May 13 puts are seeing active trading as well.

Implied Volatility Mover

3450 calls and zero puts traded in Qiao Xing Universal Resources (XING), a Chinese metal and minerals company. Shares have added 18 cents to $2.25 and the April 2.5 calls, which are 11.1 percent out-of-the-money and expire in 23 days, are the most actives. 2,400 traded (73 percent ask), Jun 2.5 and Sep 2 calls are seeing interest as well. Looks like speculative activity — perhaps a play on the renewed interest in rare earth names (also see yesterday’s note on MCP). Implied volatility in XING is up 18 percent to 90.