Wednesday Options Recap

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 |  Includes: CREE, DECK, ELNK
by: Frederic Ruffy

Sentiment

Stock market averages are probing session lows in the final hour, with cyclical and financial names leading the Dow to a triple digit loss late-Wednesday. Market action was mixed early despite some encouraging data on the domestic economic front. NY Empire Index was up to 19.5 in February, from 13.5 last month and better than the 14.0 that was expected. Separately, NAHB reported that its index of home builder sentiment was up to 29 this month, from 25 in January and also better than the 26 that had been forecast. However, Industrial Production was flat in January. Economists were expecting to see a .6 percent increase. Trading was cautious early despite the strong manufacturing and housing stats, but then sellers surfaced midday. There didn’t seem to be a specific headline to trigger the volatility, but investors remained worried about debt problems facing Greece, which is in negotiations with creditors to avoid a March debt debacle. FOMC minutes, released at 2:00 ET, didn’t seem to have much market impact. Instead, market averages remained under pressure. Caterpillar (NYSE:CAT), United Tech (NYSE:UTX), GE, BofA (NYSE:BAC) and JP Morgan (NYSE:JPM) are the Dow’s biggest losers and the industrial average is down 114 points. The NASDAQ has given up morning gains and is down 20 points following a sharp reversal in Apple (NASDAQ:AAPL) shares Wednesday. The stock hit a record of more than $526, but is now below $500. Meanwhile, CBOE Volatility Index (.VIX) is reacting to the uncertainty and has added 2.19 to 21.73. Trading in the options market is brisk, with 9.3 million calls and 8.4 million puts traded across the exchanges so far.

Bullish Flow

Deckers Outdoor (NASDAQ:DECK) adds $4.84 to $86.02 and has retraced nearly 80 percent of a four-day 7 percent losing skid suffered prior to today. Shares are rallying on volume 1.3 million, which is almost double the typical volume. Options volume is 2.5X the daily average. 11,000 calls and 2,520 puts traded on the retailer. Feb 85 calls, which are now $1.02 in-the-money after today’s move, are the most actives. 3,469 traded (86 percent Ask) against 2,276 in open interest. Upside Feb 87.5, Feb 90 and Mar 90 calls on DECK are seeing interest as well and levels of implied volatility are up 3 percent to 35. No news to explain the bullish action in the stock. Earnings are due out Feb 23, which is after the Feb expiration.

Trading is active in CREE today, amid strength in the space (LEDS, AIXG) Wednesday. CREE is up $1.28 to $28.56 on volume of 1.2 million shares, which compares to expected volume of 793,000. Meanwhile, 5,750 calls and 680 puts traded on the stock. February 28 calls, which are now 56 cents ITM and expiring at the end of the week, are the most actives. 1,860 traded. Feb 25, Feb 30, mar 27.5, and Mar 25 calls on CREE are seeing interest as well. The stock is rebounding from a 3-day 8.5 percent skid and, after a dismal performance in 2011, is up almost 30 percent year-to-date. Earnings were last reported on Jan 17.

Bearish Flow

Pre-earnings action in Earthlink (NASDAQ:ELNK) seems bearish today. Shares are down 17 cents to $8 and the focus is on at-the-money puts. Feb 8s, which expire two days after the company reports (tomorrow morning), are the most actives. 4750 traded (55 percent Ask). Mar and Apr puts are seeing interest as well and levels of implied volatility are screaming 57 percent higher to 51.5. Total volume is 8,590 puts and 1,020 calls. Typical volume in ELNK is about 150! The stock rose 6.7 percent on 10/27 after earnings were last reported. The average daily post-earnings move over the past four quarters is 3.3 percent.

Implied volatility Mover

Trading in CBOE Volatility Index (.VIX) is relatively light today after the February options expired Wednesday. The settlement value for the index is 20.44; which is down from the 23.64 at the Jan expiration, but significantly higher than the 30-day statistical volatility of the S&P — which has fallen to just 8.8 percent. Meanwhile, 130,000 calls and 48,000 puts traded on the index. About a third of the call volume is due to one spread trade, in which the investor bought 20,000 March 29 calls on the index and also bought 20,000 March 35 calls on the volatility index, paying $2.75 for the call “stupid” spread and possibly extending a volatility play on the heels of the expiration. Heading into the expiration, VIX Feb calls had about 1.46 million contracts of open interest. 80,750, or 5.5 percent, were in-the-money. Feb 35, 30 and 55 calls were the largest positions and had combined OI of almost a half million contracts.