Tuesday Options Recap

|
Includes: CHK, DELL, GE, HD, HPQ, WMT
by: Frederic Ruffy

Sentiment

Stock market averages are in the red, but well off session lows late-Tuesday. Hewlett Packard (NYSE:HPQ) shares are down 7.5 percent and weighing down the Dow Jones Industrial Average after the computer maker reported second quarter earnings that beat Street estimates, but then guided estimates lower for the third quarter and the full year. Dow component Wal-mart (NYSE:WMT) also slipped on profit news, but Home Depot (NYSE:HD) is seeing post-earnings strength. Meanwhile, the day’s economic data disappointed. Housing Starts fell to annual rate of 523,000 in April, down from 585,000 the month before and below expectations of 563,000. Industrial Production showed no improvement in April. Economists were expecting an increase of .5 percent. Crude oil and gold are also lower again today. Crude is off 25 cents to $97.12 and gold lost $8.6 to $1,482. The Dow Jones Industrial Average is down 82 points, but 87 points off session lows. The tech-heavy NASDAQ lost just 4 points. The CBOE Volatility Index (.VIX) eased .46 to 17.78. Options volume is respectable, with 9.2 million calls and 8.3 million puts traded so far.

Bullish Flow

HP is down $2.65 to $37.15 and touching new 52-week lows today after the computer maker pre-released earnings that beat Street estimates, but issued disappointing downside guidance. In very early options action, an investor bought 12,000 Jan 35 calls at $4.60 each. 25,900 traded and might be closing trades. The contract is $2.15 ITM and has open interest of 39,420, which is the second largest position in HP. (Update at 15:10: Volume in HPQ is now 157,000 calls and 131,000 puts. Average daily volume is about 30,000. Volume in the Jan 35 calls is 36,640. May 37s, which expire at the end of the week, are the next most actives. 20,230 have changed hands).

[[GE]] loses 17 cents to $19.59 and it looks like the Jan 20 straddle is sold at $3.49, 10000X on ISE. It might be closing and/or a bet that shares will stay in a range around $20 through mid-Jan 2012. The profit range is between $16.51 and $20.39.

Bearish Flow

Bearish activity detected in Chesapeake Energy (NYSE:CHK), with 38,000 puts trading, or 3x the recent avg daily put volume in the name. Shares are down 69 cents to $28.93 and the top trade is a 24,400-contract block of Jan 17.5 puts at 45 cents when the market was 40 to 46 cents. 25,800 traded vs. 5,864 in open interest. The bearish trading comes after 13F filings showed Carl Icahn reducing his stake in CHK to 2 million from 20.9 million shares (Briefing).

Implied volatility Mover

Dell Computer (NASDAQ:DELL) has battled back from morning weakness and is flat at $15.99. Shares slid in early trading after HP released its second quarter earnings and, while the EPS number topped expectations, the computer maker lowered downside guidance for the third quarter and the full year. DELL, which reports after the closing bell today, fell in sympathy and hit a morning low of $15.77. Meanwhile, trading in Dell Computer options is very heavy heading into the results. 104,000 puts and 62,000 calls traded so far. The top trade of the day is a May 14 – 15 (2X1) put ratio spread at 6 cents, 4750X and is possibly a short-term hedge, as it appears to be targeting $14 through the expiration, or a decline of 12.4 percent over the next few days. May 14 and 15 puts are the most actives as well, with more than 20,000 traded in each. May 16 puts, May 17 calls, Jun 16 puts Jun 17 calls, and Aug 15 puts are seeing brisk trading as well. Implied volatility has eased 5 percent to 38.5, as some of today’s volume is likely unwinding or closing trades ahead of Dell’s earnings.