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Sentiment

Stock market averages are rallying around Central Bank pledges of liquidity to European financial institutions. Strength in the euro and European stock indexes set the table for gains on Wall Street after the Federal Reserve, the ECB, the Bank of Japan and other central banks offer dollar loans to some of Europe’s troubled banks. The domestic economic news wasn’t as bright. Two separate reports on regional manufacturing activity – the Philadelphia Fed and the NY Empire State Index – showed larger than expected contraction in September. The August CPI was up .4 percent in August and twice as much as expected. Jobless claims increased by 11,000 to 428,000 last week. Economists were expecting a decline of about 10,000. Economic data continues to take a backseat to events across the Eurozone and the Dow Jones Industrial Average is up 171 points on the session. The tech-heavy NASDAQ gained 34.9. With less than an hour to trade, CBOE Volatility Index (.VIX) is down 2.82 to 31.78. Trading in the options market is active heading into tomorrow’s Quadruple Witch expiration. 14.4 million calls and 8.1 million puts traded so far.

Bullish Flow

Trading is very heavy in the ETF market as the options expiration, ex-div trading and morning put selling have conspired to drive volume higher. 9.2 million calls and 4.2 million puts traded across all products today. SPY calls with strike prices ranging from 112 to 118 are the most actives due to ex-div activity. Eight of the nine SPDR Select Sector Funds are seeing volume well above the average daily today. 368K options traded in XLU, for example, which is 24X the daily average for the product. In addition to ex-div activity, a number of funds are seeing adjustments ahead of tomorrow's expiration as well. Finally, there were some large sales of October out-of-the-money puts across a number of sector ETFs today -- XLF, XOP, XRT, XME, XLI, XLY. The flow was apparently being driven by liquidating sales and likely closes positions accumulated before the Labor Day weekend (on 8/30 and 9/2). For example, a 73000-contract block of Oct 11 puts at 18 cents on XLF was sold-to-close on ISE . One or more players might be exiting positions on diminishing concerns about the risk of equity market losses during the historically volatile month of October.

Yahoo (YHOO) sees a spike about an hour ago and is trading up 57 cents to $15.12 on reports the 16-year old Internet company has been approached by potential buyers. According to Dow Jones, private equity firm Silver Lake has called Yahoo Board members. The news comes one day after the company held a meeting to discuss leadership at the executive level and after Yahoo ousted CEO Carol Bartz last Wednesday. Trading in YHOO options is brisk as well. Sep 15 and Oct 16 calls are the most actives and have both traded more than 15K. The top trade is an Oct 14 - 16 call spread, 1500X on ISE and apparently a liquidating trade for a 91-cent credit, according to sentiment data. 104,000 calls and 20,000 puts traded in YHOO so far.

Bearish Flow

Dollar Tree (DLTR) touches new all-time highs today and is up $1.12 to $75.88. In options action, one strategist sold 6,645 Oct 18 calls on the retailer at $1.15. The block traded on ISE, where data confirm a customer sold-to-open. 7,598 traded against 199 in open interest. Deutsche Bank initiated the stock with a Buy and $81 price target today.

Implied volatility Mover

UBS is falling to new 52-week lows and options on the bank are seeing brisk trading on news a rogue trader racked up roughly $2 billion in losses at the Swiss bank. Shares hit $11.4 in morning trading and are down $1.14 to $11.54. Options volume is 1,285 calls and 3,310 puts. By way of comparison, typical volume in UBS through the first forty minutes is about 280 contracts. The top trade is a 1,400-contract block of Dec $12 puts at $1.65 when the market was $1.60 to $1.75 and is possibly liquidating of in-the-money puts. Beyond that, the action has been in smaller lots and the next largest trade is a 161-lot of Sep $11 calls at 55 cents. 704 traded. Oct 12 puts, Sep 12 calls, and Sep $11 calls on UBS are seeing interest as well. Implied volatility is up about 6 percent to 76.

Source: Thursday Options Recap