Tuesday Options Recap

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 |  Includes: BAC, BHI, CVX, DHI, JNJ, KO, KODK
by: Frederic Ruffy

Sentiment

Stocks rallied around economic data and earnings news Tuesday. A report released before the opening bell on Wall Street showed Housing Starts improving to an annual rate of 629,000 in June, which was up from 549,000 the month before and considerably better than the 570,000 that was expected. Meanwhile, IBM rallied 5 percent and is the best gainer in the Dow Jones Industrial Average after the computer maker posted earnings that beat Street estimates. Coca Cola (NYSE:KO) is also helping the industrial average on profit news. BofA (NYSE:BAC) and Johnson & Johnson (NYSE:JNJ) are seeing post-earnings weakness and are the Dow’s only losers heading into the final hour. Consequently, the industrials are up 190 points. The tech-heavy NASDAQ added 53.5. CBOE Volatility Index (.VIX) edged down .56 to 20.39 heading into VIX July options expiration. Trading in the options reflects today’s bullish sentiment, with 7.5 million calls and 5.4 million puts traded across the exchanges so far.

Bullish Flow

Chevron (NYSE:CVX) adds $1.04 to $107.27 and is one of 23 Dow stocks moving higher Tuesday. In CVX options action, a Sep 115 – 120 call spread trades at 63 cents, 5000X. This looks buyer-initiated and has traded multiple times. Volume in both contracts now exceeds 7000. It’s possibly rolling up in strikes, but more likely a bullish vertical spread with a position delta of .12 and comes ahead of earnings, due the morning of Jul 29.

The biggest options trade Tuesday morning was in Baker Hughes (NYSE:BHI), but was later canceled. Shares traded up 91 cents to $77.91 and have now rallied 15.8 percent since 6/24. A 20,000-contract block of Aug 80 calls trades at $2.33 on CBOE when the market was $2.30 to $2.35. The Aug 80 call on the oil driller is 2.7 percent OTM with a delta of .42 and open interest of 3,357. However, the initial trade was apparently canceled and adjusted to 2000 contracts at $2.33 apiece. 3,154 now traded against 3,357 in open interest. Shares are up $1.05 to $78.05 and the market on the Aug 80 call is $2.37 to $2.40.

Bearish Flow

DR Horton (NYSE:DHI) adds 67 cents to $11.96 after today's Housing Starts data showed an increase to 629,000 in June, which was up from 549,000 the month before and considerably better than the 570,000 that was expected. In DHI options action, one investor seized the day's strength to sell 18000 Aug 12 calls at 37 cents per contract. 19,560 now traded against 13,041 in open interest. The Aug 12 call on the homebuilder is nearly at-the-money with a delta of .49. Interestingly, a block of 30,800 Aug 7 puts on Pulte Group was sold at 29 cents per contract at about the same times as the DHI call write. Maybe this is part of a pairs trade -- selling at-the-money calls on DHI and at-the-money puts on PHM.

Implied volatility Mover

Eastman Kodak (EK) shares are setting new 52-week lows and implied volatility in Kodak options continues to climb higher. Shares are down 23 cents to $2.29. Options volume is 81,000 puts and 19,000 calls. Sep 2 puts, which are 12.7 percent out-of-the-money, are actively traded. 14,000 contracts so far. January 3, 3.5, and 4 in-the-money puts are seeing heavy trading as well. There seems to be a mix of buying and selling. Still, implied volatility in Kodak options is up 32 percent to 82.5, as it appears that investors are bracing for additional losses in shares during the weeks/months ahead. Options action in EK was brisk yesterday as well, with 147,000 puts and 36,000 calls traded in the name.