Tuesday Options Recap

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 |  Includes: DRI, IGT, SUNEQ
by: Frederic Ruffy

Sentiment

Trading was sluggish early Tuesday, but stocks caught a bid late in the day on news from the Eurozone. With no economic data and a light earnings calendar to guide the action, the underlying tone remained cautious Tuesday morning after Standard & Poor’s warned of possible credit ratings to 17 EU nations late-Monday. However, stocks strengthened in afternoon action on reports EU officials are in talks to double the size of a key rescue fund. The Dow Jones Industrial Average is now up 114 points and the tech-heavy NASDAQ gained 7.5. CBOE Volatility Index (.VIX) edged down .42 to 27.42. Trading in the options market is heavily distorted due to high volume in a number of individual stocks going ex-dividend. 12.5 million calls and 4.5 million puts traded across the exchanges so far.

Bullish Flow

3,855 calls and 350 puts traded in International Game Technology (NYSE:IGT) today. Shares are off a dime to $17.40 and the flow is concentrated in Dec 18 calls. 3,113 traded against 580 in open interest. The action includes a multi-exchange sweep of 2840 contracts for 30 cents when the market was 25 to 30 cents. Looks like upside call buying and implied volatility in the options on the stock is 4 percent higher to 37. Shares are off a bit today, but up 7.4 percent since 11/23. Credit Suisse maintained an Outperform rating and $24 price target on IGT Tuesday.

MEMC's (WFR) woes continue. Shares are down 11 cents to $4.15 and have lost 63.2 percent year-to-date. Meanwhile, options volume on the silicon wafer maker is 20,000 calls and 4,800 puts. Jan 6 calls, which are 44.6 percent out-of-the-money and expiring in 45 days, are the most actives. 6,676 traded, including a multi-exchange sweep of 1,490 contracts for 8 cents when the market was 6 to 8 cents. It's possibly a closing trade, as open interest is 8,865. Jan 5, Jan 7.5, April 6, and April 8 calls are also seeing interest. Jan 7.5 and 4 puts are seeing volume as well. Meanwhile, implied volatility in WFR options is up 6 percent to 69.5, but with no company news to explain the notable call activity in MEMC Electronics Tuesday.

Bearish Flow

Darden Restaurants (NYSE:DRI) is down and implied volatility in the options on the stock is up after the company issued a warning for the second quarter and full year. Shares are off $5.50 to $42.23. Options volume is 15,000 puts and 7,500 calls, which is 13X the daily average for the restaurant operator. The top trade is a multi-exchange sweep of 1846 Dec 43 puts at $1 when the market was $1.0 to $1.10, which might be a liquidating trade. 4784 traded against 2858 in open interest. Dec 42 and 45 puts are seeing interest as well. Jan 48 is the most active call option in DRI. Meanwhile, overall levels of implied volatility are up 7 percent to 34, as the focus will next turn to the company’s actual earnings report — which is due around Dec 19.

Implied volatility Mover

CBOE Volatility Index (.VIX) drifts down .24 to 27.60 and is now off nearly 20 percent since 11/25. Noteworthy trades on the market’s “fear gauge” Tuesday morning is a Dec 35 – Feb 55 call spread sold at 15 cents, 55000X. Feb 55 calls were bought and the action might roll a position in Dec 35 calls, as open interest in the contract is 229,455 — currently the biggest position in the volatility index — and the contract expires in 14 days (Wednesday after the standard expiration). If so, the strategist is buying two more months for the trade to play out and rolling the position up 20 strikes. VIX hit its best levels of the year on 8/8 when the index rallied to 48.