Thursday Options Recap

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 |  Includes: BK, NKE, SWHC, XLB, XME, XOP
by: Frederic Ruffy

Sentiment

Stock market averages slid disappointing economic news from overseas. Data released Wednesday showed China’s manufacturing activity slowing in March for the fifth consecutive month. Then, reports out of the Eurozone indicated that declining in factory activity in France and Germany helped drive further contraction in the region’s manufacturing activity. The domestic economic news was less bearish. The List of Leading Indicators rose .7 percent in February and .1 percent more than expected. Jobless claims declined by 5,000 last week and 8,000 better-than-expected. Yet, crude oil is taking it on the chin following the poor manufacturing data and lost $1.82 to $105.45 per barrel. Natural gas slipped on bearish weekly inventory data and the decline in oil and gas is weighing on the energy-related names. Exxon (NYSE:XOM) and Chevron (NYSE:CVX) are among the 22 decliners within the Dow. However, Caterpillar, BofA (NYSE:BAC) and Alcoa (NYSE:AA) are the biggest losers in the industrial average and the Dow is down 88 points heading into the final hour. The NASDAQ gave up 16.6 points. CBOE Volatility Index (.VIX), which settled the March expiration at only 14.55 yesterday, is up 1.09 to 16.22. Trading in the options market is active reflects the more cautious underlying tone. 6.4 million puts and 6.2 million calls traded across the exchanges so far.

Bullish Flow

Smith and Wesson (NASDAQ:SWHC) is shooting higher and was recently up $1.03 to $7.93 on heavy volume of 3.5 million shares after peer Sturm Ruger reported strong bookings. Ruger booked more than a million orders for firearms in the first quarter. Investors are fired up for SWHC options as well. 3,400 calls and 225 puts traded on the stock so far. Apr 8 calls are 7 cents out-of-the-money and are the most actives in the name. 1,180 traded. Apr 7 and Jun 8 calls are busy as well and levels of implied volatility are 11 percent to 45.5. SWHC reported its earnings on 3/8. Shares shot 22.8 percent higher on the results.

Bank of New York Mellon (NYSE:BK) loses 34 cents to $23.70 and a 2300-lot of May 25 calls trades on the bank for 50 cents per contract on ISE. Data from the exchange is reporting an opening buyer. More than 6,000 now traded and might include some rolling out of Apr 22 calls, which have traded 2,000 contracts and 79 percent traded on the bid. 9,290 calls and 1,475 puts now changed hands on the bank and implied volatility in BK options rose 5 percent to 27.5, which is the highs of the year and compares to a 52-week range of 17 (5/31) and 69 (8/10).

Bearish Flow

A few significant blocks traded in some of the sector exchange-traded funds electronically on ISE this morning. All three are opening customer buyers, according to data from the exchange. SPDR Metals and Mining ETF (NYSEARCA:XME) is off $1.58 to $49.15 and 19,030 April 43 puts traded for 39 cents per contract. SPDR Oil and Production Fund (NYSEARCA:XOP) lost $1.84 to $57.67 and 18,900 April 50 puts traded for 33 cents each. SPDR Basic Materials (NYSEARCA:XLB) gave up 66 cents to $36.46 and 16,100 Apr 35 puts traded for 36 cents. Looks like hedging activity focused on the more economically-sensitive sectors of the market.

Implied volatility Mover

Nike (NYSE:NKE) is little changed, but options volume is high heading into this afternoon's earnings release. NKE slipped 35 cents to $110.08 on volume of 3 million shares, which is almost double the typical volume. Meanwhile, 26,000 calls and 19,000 puts traded on the stock -- or 4.5X the daily average. The action has been in small lots. The top trade is 989 Apr 115 calls for $1.52 on CBOE when the market was $1.50 to $1.53. The next biggest trade is a four-way spread, in which the investor sold 247 Weekly (3/23) 110 straddles and bought 247 Apr 110 straddles, paying $1.72, to open on ISE. Data from the exchange is confirming the weekly straddle was sold to buy the Apr at-the-money straddle and the position seems to reflect expectations for little movement around the earnings release. It also takes advantage of the high IV in the front-month (try /term NKE). However, NKE is capable of large daily moves around earnings. The avg move over the past quarters is almost 7 percent, including a 10.1 percent rally on June 28.