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Sentiment

Stock market averages are deep under water late-Monday. S&P’s downgrade of US debt late-Friday weighed heavily on global equity markets when trading resumed Monday. The Dow Jones Industrial Average opened lower and the decline gathered additional momentum throughout the trading day. With less than an hour remaining to trade, the industrial average is down 500 points. The tech-heavy NASDAQ lost 144. CBOE Volatility Index (.VIX) rallied to its best levels since May 21, 2010 and was recently up 44.55. Trading in the options market remains brisk. Friday was an industry record with almost 40 million contracts traded. No volume data available today.

Bullish Flow

Weatherford (NYSE:WFT) loses $1.40 to $16.80 amid volatility in the drillers after crude oil lost another $3.36 to $83.52 per barrel. A noteworthy options trade in WFT today is an Aug 18 – Sep 17 call spread bought at 91 cents, 15000X. It might roll a position out one month and down 1 strike. Shares had performed well with help from upbeat earnings in July, but after a 17 percent slide last week, all those gains have been erased.

Virgin Media (NASDAQ:VMED) loses $1.37 to $22.24 and one strategist sells 10,000 Jan 29 calls at 65 cents to buy 6,000 Jan 25 calls at $1.80. It likely rolls a position opened a few weeks ago when the Jan 29 – 33 (1X2) call ratio spread was bought at 60 cents, 10000X. If so, the investor now has a Jan 25 – 33 (6000X20000) ratio spread and is looking for the stock to rebound through Jan 2012. Shares of the media giant are down 19.4 percent since the initial trade was initiated.

Bearish Flow

RIM (RIMM) is falling to new 52-week lows today and was recently down $1.35 to $22.04. A noteworthy spread trades in the Blackberry-maker after one strategist sold 36,875 Jan 24 puts at $4.825 to buy 49,200 Jan 21 puts at $3.25. It probably rolls a position in Jan 24 puts opened last week at $3.5 per contract.

Implied volatility Mover

The surge in implied volatility in the financials is impressive today. In Citi (NYSE:C), which is trading down $4.95 to $28.49, implied vols in the options are up more than 100 percent and moving into the triple digits (109). BofA (NYSE:BAC) implied volatility is up 75 percent to 150, State Street (NYSE:STT) implied vols jumped 75 percent to 70, AIG gained 67 percent to 67, Goldman vols rallied 65 percent to 65, and Morgan Stanley (NYSE:MS) saw a 63 percent increase to 86. Wells Fargo (NYSE:WFC), HSBC (HBC), and American Express (NYSE:AXP) are seeing much higher levels of implied volatility as well. The sector is selling off on the S&P downgrade, which has also resulted in a jump in the cost of insuring US bank debt (credit default swaps). In BofA, for example, the day's increase was 51 percent to 310 basis points, according to Dow Jones.

Source: Monday Options Recap