Wednesday Options Recap

by: Frederic Ruffy


The last day of trading for February has been characterized by choppy trading in the equity market, but increasing volatility in other assets. Bonds sold off sharply following a round of better-than-expected economic news. Chicago PMI improved to 64 in February, from 60.2 in Jan and significantly better than the 60.0 that was expected. Fourth quarter GDP was 3 percent and .2 percent better than expected. The real bid-whacking in the bond pits didn’t happen until 10:05, however, after Fed head Ben Bernanke failed to deliver any signs of QE3 in prepared remarks to Congress. According to a futures trader close to the action, an investor had accumulated a sizable position in long TY futures ahead of the speech and, when Bernanke didn’t deliver, the position was dropped like a bad habit. The massive trade, involving an estimated 75K futures, left some wondering if the trade was an error. It appears that it was real. Gold and silver tanked at about the same time, while the dollar index saw a spike higher. In Europe, the euro sank .8 percent on the buck after the highly-anticipated refinance operations from the European Central Bank were roughly in-line with expectations – banks borrowed a bunch of money from the ECB. End-of-the-month position squaring is probably a factor for the equity market as well. The Dow Jones Industrial Average is down 40 points and the NASDAQ lost 15.5. CBOE Volatility Index (.VIX) added .06 to 18.02. Trading in the options market is picking up from very low levels Monday and Tuesday. 7.9 million calls and 6.5 million puts traded across the exchanges so far.

Bullish Flow

Equniix (NASDAQ:EQIX) is up $2.74 to $141.79 after Capstone initiated the Redwood City, CA with a Buy rating. One player seems convinced and bought 10,000 June 160 calls on the stock for $3.3 per contract. 14,280 Jun 160 calls now traded on the stock against just 82 in open interest. 4,510 Mar 140 calls changed hands in EQIX options. Total volume is 22,000 calls and 1,045 puts. EQIX is a big implied volatility mover today as well — up 30 percent to 38. The stock is already up 40 percent year-to-date and setting new 52-week highs today. Still, today’s flow seems to reflect expectations for additional gains in the months ahead.

Follow-up on the 5000-lot of March 60 calls on the iShares South Korea Fund (NYSEARCA:EWY) bought to open for 72 cents per contract on ISE yesterday (see 2/28 color). Shares are up $1.25 to $60.18 today and the market on that option is now $1.29 to $1.36 after North Korea agreed to a moratorium of testing of nuclear and long-range missiles. AP is also reporting that it will suspend enrichment of uranium for power plants and allow inspectors to confirm the disablement of a reactor at Yongbyon. US has agreed to ship 240K tons of food to North Korea in exchange for its cooperation.

Bearish Flow

Bearish trade is being opened in Finisar (NASDAQ:FNSR) ahead of earnings. Shares are off $1.11 to $20.68 and one strategist sold 3640 calls on the Sunnyvale, CA networking company at 50 cents to buy 3640 Mar 20 puts for $1.05. The combo appears to be a new position and might "collar" FNSR stock ahead of the news, which is due out after the closing bell. FNSR can sometimes see sizable moves around profit reports. The average daily post-earnings move over the past four quarters is 19 percent (with one win and three losses) and includes a 38.5 percent plunge on 3/19. The March 20 straddle currently trades for $2.70, or about 13 percent of the spot.

Implied volatility Mover

Options order flow in Pan American Silver (NASDAQ:PAAS) seems bullish today, even as the metal sees a dramatic mid-morning reversal and a sharp sell-off Wednesday. Silver traded as high as $37.48 early, but was recently down $1.25 to $35.89. (Gold down $54 from the day’s highs). Meanwhile, PAAS is off 51 cents to $25.73 and well off the best levels of $27.11 on heavy volume of 2.1 million shares, which is more than 3X the expected. Meanwhile, 15,000 calls and 1965 puts traded on the stock. Some of the action in the in-the-money March 25 calls might be dividend related. The stock goes ex-div tomorrow. However, July 30 calls are the most actives. 5,820 traded and 92 percent traded at the ask, against 1,432 in open interest. The tope trade is 4500 contracts for $1.55 when the market was…$1.35 to $1.45. Beyond that, the flow has been in smaller lots. Volatility in the underlying and increasing options volume have conspired to send levels of implied vols up 5.5 percent to 38, but not far from the 52-week low of 34 set Friday. PAAS has been grinding higher lately with help from rallying silver prices and is up 11.6 percent month-to-date. However, shares are well below the levels seen in the Spring 2010, when the stock once fetched more than $43.