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Sentiment

Stock market averages have pared losses and are modestly lower late-Wednesday. The underlying of tone turned cautious in morning action after big gains the day before and after data showed Existing Home Sales improving to an annual rate of 4.42 million in November, which was up from 4.25 million the month before and well short of expectations (5.03 million). Meanwhile, the tech-heavy NASDAQ took a hit following an earnings miss from Oracle (ORCL). Shares of the software maker are down 11.7 percent. Uninspired market action across Europe and a .3 percent dip in the EUR/USD currency pair also kept a lid on early gains on Wall Street. The Dow Jones Industrial Average traded lower early and was down about 75 points through midday. However, with no major news items to guide the action and trading slowing ahead of the holiday weekend, the Dow has pared its losses and is down just 13 points. The NASDAQ has given back 30 of yesterday’s 80-piont surge. CBOE Volatility Index (.VIX) is down 1.28 to 21.94 and falling to its lowest levels since July. Trading in the options market is being distorted by some ex-dividend activity in GE and MO. Volume is otherwise light. 10.1 million calls and 5 million puts traded across the exchanges so far.

Bullish Flow

CVS touches a new 52-week high today and is up a dime to $39.90. The top options trade on the stock is a 14,200-contract block of Jan 40 calls, bought for $1.24 per contract on CBOE. It’s possibly closing, as the contract is now at-the-money and has 43,136 in open interest, which is the largest position in the name. 16,800 now traded. Or, it might be a bullish play on CVS the day after the company backed its guidance and announced plans to raise its dividend. Shares rallied 8.8 percent on the news yesterday.

Bearish Flow

Big Print in the MSCI Eafa Fund (EFA) today, which is down 41 cents to $48.58, after one strategist apparently bought 50,000 Sep 35 puts on the ETF for $1.80 and sold 18,750 Sep 30 puts at $1. The spread looks opening and possibly to hedge some tail risk of holding shares of companies from European, Far Eastern and Australian equity markets through the first three quarters of 2012. Sep 35 puts on EFA are 28 percent OTM with a -.14 delta.

Implied volatility Mover

A significant number of options on the volatility index are expiring worthless after the index settled at 21.36 for the Dec expiration and below today’s lowest reading in the spot index, which is 21.87. VIX settled 36 percent below the levels seen at the previous expiration, when the settlement value was 33.36. The largest open interest position in the index heading into the expiration was VIX Dec 20 puts. OI is 166,600. Upside Dec 35, 40, and 45 are among the largest positions as well. The settlement of VIX, which is computed using implied volatility in the options on the SPX rather than the spot index itself, might be one factor driving the unusual behavior of the index today. The market’s “fear gauge” is down .55 points to 22.67 and falling to multi-month lows, even as the S&P 500 is down 7 points on the session.

Source: Wednesday Options Recap