Wednesday Options Recap

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Includes: CIE, DHI, ITB, LEN, PHM, PLX, TOL, XLE
by: Frederic Ruffy

Sentiment

Stock market averages fell at the open on jobs data, but trading has turned mixed late-Wednesday. ADP's monthly payroll report, which showed the economy adding 119,000 jobs in April, set the table for morning weakness on Wall Street. Economists were expecting an increase of 170,000. A 2.6 percent slide in Spain's IBEX amid ongoing concerns about the debt crisis ahead of elections in France and Greece added to the morning anxiety. Meanwhile, crude slipped and is down 94 cents to $105.22 on bearish weekly inventory data and gold lost $7.5 to $1655 an ounce. Yet, the morning stock market slide was orderly and the Dow Jones Industrial Average is down just 34 points. With forty-five minutes left to trade, the NASDAQ erased early losses and is up 2.3 points. CBOE Volatility Index (.VIX) is up .36 to 16.96 amid light volumes in the options market. 6.8 million calls and 5 million puts traded across the exchanges thus far.

Bullish Flow

Call volume in the homebuilder sector is very heavy this morning as seven stocks touched new 52-week highs. The relative strength in the sector is being attributed to an LA Times article suggesting that the Federal Housing Finance Agency is under pressure to allow Freddie and Fannie to lower loan balances for struggling home owners. Call volume of 41,000 contracts through midday is 4x the normal weighted level and Lennar (NYSE:LEN), DR Horton (NYSE:DHI), Toll Brothers (NYSE:TOL) and Pulte Group (NYSE:PHM) lead the most actives. We noted bullish flow in the ITB Sector ETF yesterday ahead of today's 3% lift, and today the DHI May 18 calls are seeing buying as well as TOL may 28 calls.

Cobalt Intl Energy (NYSE:CIE) is off $1.17 to $24.49 in relatively active trading of 1.3 million shares and has suffered a two-day 8.4 percent slide since earnings were reported yesterday morning. However, options order flow seems somewhat bullish after 6,435 calls and 460 puts traded on Houston, TX oil and gas company. July 30 calls, which are 22.5 percent OTM, are the most actives. 3,670 changed hands. Upside May 25, May 32.5, and July 27.5 calls are seeing interest as well. CIE came under pressure in mid-April on a negative piece in the Financial Times related to a partnership in Angola. Shares have now tumbled 23.5 percent since mid-Feb and have retraced nearly all (filled the gap) from 2/10 when the stock surged 32.6 percent on news of a successful pre-salt test offshore Angola. Morgan Stanley maintained an overweight on the stock today and lower the price target to $39 from $40.

Bearish Flow

Hefty spread in the SPDR Energy Fund (NYSEARCA:XLE) early-Wednesday, which is trading down $1.28 to $70.98 on weakness in the oil-related stocks after crude slipped 42 cents to $105.74 ahead of this week's inventory data. A Sep - Dec [QTRLY] 74 put spread was apparently bought on the ETF for $1.70, 20000X, and probably rolls a hedge out from September to the year end options. XLE, which holds all of the energy names from the S&P 500, has been lagging most of the other eight Select Sector Funds so far in 2012 and is up just 2.8 percent year-to-date.

Implied volatility Mover

Protalix BioTherapeutics (NYSEMKT:PLX) is up 81 cents to $7 in active trading of more than 10 million shares and implied volatility in the options on the biotech is down sharply after the FDA approved an orphan drug for treating Gaucher disease. PLX options are busy with 11,000 calls and 20,000 puts on the tape so far. The top trade is a 2000-lot of May 6 calls sold at $1.30 per contract on ISE, to open (according to ISEE data). It's possibly an overwrite strategy against stock. The next biggest trade is 1668 May 6 puts sold at a dime on ISE and a closing trade. Indeed, it seems that premium sellers are driving much the flow in PLX today and 30-day ATM implied volatility has plummeted 52 percent to 94. IV was at 52-week highs of 196 prior to today's news. The 52-week low of 49.5 dates back to March 16.