Tuesday Options Recap

by: Frederic Ruffy


Stocks are mixed in a slow day of trading Tuesday. The only economic stat on the calendar was a report on New Home Sales. It showed improvement to 323,000 in April, which was 22,000 better-than-expected. The data didn’t have much market impact and the Dow Jones Industrial Average was holding modest gains at midday with help from Exxon Mobil (NYSE:XOM) and Chevron Texaco (NYSE:CVX). The two oil giants are the best gainers in the industrial average after crude oil gained $1.80 to $99.50 per barrel. However, relative weakness in GE, JP Morgan (NYSE:JPM) and Boeing (NYSE:BA) are seeing relative weakness and keeping a lid on any real rally attempts. The Dow Jones Industrial Average is up 4 points. Meanwhile, the tech-heavy NASDAQ lost 6.5. CBOE Volatility Index (.VIX) is down .59 to 17.68 on a slow day for the options market. 5.9 million calls and 5.2 million puts traded so far.

Bullish Flow

Pre-earnings action in American Eagle (NYSE:AEO) today. Shares are up 11 cents to $13.63 and recent trades include a multi-exchange sweep of 5,000 Jun 15 calls at the 25-cent asking price. ISEE data indicate a customer bought-to-open a new position. 6,265 now traded. Another sweep of 1,668 Nov 14 calls traded at the $1.35 asking price. 1,839 have now changed hands. The apparel retailer lost 7.5 percent Friday on disappointing earnings from ARO and GPS. Today's call buyers might be taking bullish positions on the view that the bad news has now been discounted heading into AEO's earnings, which are due out tomorrow morning. Shares are down 14.9 percent over the past month.

Steve Smith notes for Whatstrading.com today that: Saks (NYSE:SKS) shares are off 7c to $10.85 and option volume 13x the daily average, being driven by 25,000 contract block of the August 10 puts which were sold at the 40c bid. This appears to be an opening sale and likely tied to stock. The traded coincided with a block of 725K shares at $10.92.

Bearish Flow

The most actively traded equity options early Tuesday were in Cisco Jan 16 puts, Jan 12.5 puts, and Jul 16 calls. The activity includes a ratio spread, in which the strategist apparently sold 10,000 Jan 16 puts at $1.29 and bought 20,000 Jan 12.5 puts at 29 cents. This 1X2 put ratio backspread might be a closing trade or rolling activity, as open interest is sufficient to cover in both contracts. Jan 16s have now traded 21,251X. Meanwhile, volume in the Jul 16 calls is 16,229 contracts and, with 96 percent trading at the ask, it looks like buyers are dominating the action. CSCO is down 4 cents to $16.31 today and came under fire on May 12 after earnings were reported. Shares lost 4.8 percent on the news and are down another 3.7 percent since that time. A fresh 52-week low of $16.22 was set yesterday.

Implied volatility Mover

China Biotics (OTC:CHBT) implied volatility is reaching extremes, as shares lose another $1.37 to $7.87. The stock has now suffered a 35.7 percent slide in less than a week. The precipitous decline seems to reflect concerns about US-listed shares of Chinese companies after recent debacles like China Medical Express (OTCPK:CCME) and China Agritech (OTCPK:CAGC). Meanwhile, today’s options volume in CHBT is 7,650 calls and 8,630 puts. Players are taking positions in anticipation of the stock’s next move and implied volatility is up 14 percent to 210.