Thursday Options Recap

 |  Includes: AAPL, BAC, HRBN, MO, MRK, PFE
by: Frederic Ruffy


Stock market averages are under water late Thursday. The table was set for morning gains after the financials rallied around news Buffett’s Berkshire is investing $5 billion into Bank of America (NYSE:BAC). Shares of the bank surged more than 20 percent and, now up 9.6 percent, are the best gainers in the Dow Jones Industrial Average. However, early gains were lost after Germany’s DAX saw a sudden spike lower and traded down 4 percent in late action across the Atlantic. DAX finished down 1.7 percent. The Dow traded lower along with Eurozone stock benchmarks through late morning and never recovered. The day’s economic data didn’t help much, as the only stat of the day showed an increase of 5,000 in Weekly Jobless claims. Economists were looking for a decline of 12,000. With forty minutes left to trade, the industrial average is down 114 points. The tech-heavy NASDAQ lost 34, with Apple Computer (NASDAQ:AAPL) weighing after Steve Jobs' announced departure. Attention turns to GDP numbers and a speech from Fed Chairman Ben Bernanke Friday. CBOE Volatility Index (.VIX) is up 2.91 to 38.81 ahead of the news. Trading in the options market continues to reflect the cautious underlying tone. 7.6 million calls and 8.7 million puts traded across the exchanges so far.

Bullish Flow

Pfizer (NYSE:PFE) loses 18 cents to $18.21 and early options trades in the drug-maker include a Jan13 12.5 - 20 (2X1) ratio risk-reversal, 7500X on CBOE. 35 cents was collected to sell two puts, buy one call and apparently open a new longer-term bullish position in Pfizer. Shares are down 11.7 percent since June, but up 9.2 percent from the multi-month lows set on Aug 8.

Merck (NYSE:MRK) loses 37 cents to $31.86 and a Jan13 20 – 35 (2X1) bullish ratio risk-reversal trades on the pharmaceutical maker at 16 cents, 7500X. The position looks open and is the same trade as the one highlighted earlier today in Pfizer. In both cases, the strategist is writing downside puts to buy half as many upside calls. If shares fall below the strike price of the puts through the 2013 expiration, they’re likely willing buyers of the stock at that price. On the other hand, better profits are possible if shares rally beyond the strike price of the calls and the puts expire worthless. If shares hold between the two strikes, both contracts expire worthless and the credit is kept.

Bearish Flow

Altria (NYSE:MO) loses 46 cents to $26.01 and 17,036 Oct 26 puts traded on the tobacco company. 76 percent traded at the Ask and open interest is 214 contracts. The Oct 26 put on MO is at-the-money with a delta of -.5 and expiring in 57 days. No news on the ticker today, but implied volatility is up 13 percent to 25. Today's bearish trading is perhaps hedging activity related to regulatory headwinds in the tobacco industry. Shares have been under pressure in recent months, but the decline has been orderly. MO is down 7.3 percent since May.

Implied volatility Mover

32,000 calls and 11,000 puts traded in Harbin Electric (NASDAQ:HRBN) so far today. Shares are down a nickel to $17.15 and lost 6.9 percent yesterday after a blog post on Seeking Alpha suggested the company doctored SAIC reports. Executives of the Chinese company were out defending the company yesterday and reiterated plans to take Harbin private at $24 per share. In today’s options action, the top trade is a 6000-contract block of Dec 17.5 calls bought at $3.4 and tied to 115K shares at $17. It’s possibly a bet that the buyout will happen before the December expiration. Another noteworthy trade in HRBN today is a Sep – Dec 20 call spread, bought at $1.35, 3400X. The timespread is probably a bet that shares will remain below $20 through the September expiration (22 days) and then rally thereafter. It might be rolling action. Implied volatility in HRBN options, which surged 21 percent yesterday, has eased 3.5 percent but remains elevated at 150 – which reflects the uncertainty related to the potential buyout.