Friday Options Recap

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 |  Includes: CAT, ESRX, ETFC, MCD, MHS, SCHW, UNM, VZ, WBMD
by: Frederic Ruffy

A quick recap today because of travel. The Dow Jones Industrial Average is down 37 points in afternoon trading due to post-earnings losses in Caterpillar (NYSE:CAT), Verizon (NYSE:VZ) and GE. McDonald’s (NYSE:MCD) edged up 3 percent and among 11 Dow stocks holding gains on better-than-expected profits. Still, the industrials are down 42 points. Overall, however, market action is mixed with 250 S&P 500 stocks posting gains at midday. The Nasdaq has added 20 points. A long-awaited plan for Greece and an absence of economic news has most of the focus on earnings. The deadlock on the debt ceiling debate is causing some uncertainty, but so far there’s no panic on Wall Street ahead of the August 2 deadline. In fact, CBOE Volatility Index (VIX) is down 0.24 to 17.32 and options volume is light. 5.6 million calls and 4.7 million puts traded so far.

Bullish Flow

Express Scripts (NASDAQ:ESRX), which rallied 5.4 percent yesterday after the company announced plans to acquire Medco (NYSE:MHS), is up another $1.46 to $56.81. A noteworthy recent options trade in ESRX is a four-way spread, in which the strategist sold Jan. 13 40-42 “stupid” put spreads at $4.20 (sold both legs), 5000X, to buy the Jan. 13 60-70 call spread at $3.50, 10000X. All four legs of the spread look opening and the position seems to be a bullish play in anticipation of a move beyond $60 in ESRX shares through 2013. 30,000 calls and 12,000 puts now traded in the name. MHS is seeing action as well. Shares are up $2.17 to $66 and Oct 52.5 puts are the most actives. 4,508 traded. There’s some doubt about the deal clearing anti-trust hurdles. For that reason, perhaps, MHS closed Thursday almost $10 below the proposed takeover offer.

Bearish Flow

Verizon (VZ) is down $1 to $36.57 and one of 24 Dow stocks in negative territory through the first hour of trading Friday. Verizon reported a quarterly profit of 57 cents per share on $27.54 billion in revenues. The Street was expecting 55 cents on $27.43 billion. The whisper number might have been higher because shares were up 2.3 percent in the three days leading up to the report, but have given back those gains and a bit more today. Meanwhile, the top options trades in VZ today are part of a spread, after an investor bought 4,500 VZ Jan. 31 puts at 64 cents and sold 4,500 Jan. 30 puts at 49 cents. 15 cents was paid for the Jan 30-31 put spread and this might be a roll or exit, as open interest is sufficient to cover in both contracts. On the other hand, it might be an opening play targeting a move to $30 (-18 percent) or less through the Jan. expiration.

Implied Volatility Mover

Bullish trading continues in Etrade (NASDAQ:ETFC). The action started Tuesday on unsubstantiated chatter that activist investor Carl Icahn was taking a stake in the company and heavy trading continued Wednesday after Citadel disclosed a 9.8 percent position in the online broker (see 7/19 and 7/20 color). Today, shares are up 24 cents to $15.68 and the top options trade is a 7,380-contract block of Sep. 18 calls at 34 cents on ISE. Sentiment data indicate an opening buyer. Separately, 5,000 were bought at 63 cents on PHLX. 11,391 Sep. 18 calls on Etrade now traded. Aug. 15 puts are the second most actives. Sep. 16, Oct. 16 and Oct. 18 calls are busy as well. Meanwhile, implied volatility rallied 18 percent to 45, as investors take positions in anticipation of additional news on the buyout front.

Unusual Volume Movers

Bearish activity detected in Unum (NYSE:UNM), with 5405 puts trading, or 82x the recent average daily put volume in the name.

Bullish flow detected in WebMd Health (NASDAQ:WBMD), with 7675 calls trading, or 3x the recent average daily call volume in the name.

Bearish activity detected in Charles Schwab (NYSE:SCHW), with 9456 puts trading, or 8x the recent average daily put volume in the name.

High options volume is being seen in Caterpillar (CAT), Verizon and McDonald’s (MCD).