Wednesday Options Recap

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 |  Includes: DELL, HPQ, SA, XOP
by: Frederic Ruffy

Sentiment

Another round of contagion sent stocks broadly lower Wednesday morning, but market averages are well off session lows heading into the final hour. Japan's Nikkei lost 2 percent and Hong Kong's Hang Seng fell 1.3 percent. The sell-off was instance across the Eurozone, with a 3.7 percent slide in Italy's MIB Index pacing the decline. The euro made a run below 1.26 and to its lowest levels since July 2012 against the buck. Crude oil fell below $90 for the first time since October on bearish weekly inventory data. Gold gave up $18.5 to $1,558, but is up from the day's lows of $1,553. Meanwhile, the Dow Jones Industrial Average hit a low of 12,312 this morning, but is now down 70 points to 12,433 and still climbing. The late-day rally was fueled partly by comments by Fed's Kocherlakota, saying a case could be made for new Quantitative Easing and that the Federal Reserve has tools to curb damage Europe. From a chartist's perspective, the activity seems to be setting up as a bullish midweek reversal, which sometimes happens precisely midweek after a period of extreme bearish sentiment. Follow-through Thursday morning is one of the key ingredients for confirmation that we have indeed seen bullish midweek reversal. In options action, CBOE Volatility Index (.VIX) hit a high of 24.62 and is now up .52 to 23. Trading in the options market is active, with 7.2 million calls and 7.5 million puts traded across the exchanges so far.

Bullish Flow

Seabridge Gold (NYSE:SA), a Toronto-based miner, sees a second day of relative strength and high volume. The stock is up 9.1 percent to $14.32 and near session highs in active trading of 815K shares (average daily is 464K). Meanwhile, 5,000 calls and 1,590 puts traded on the stock, which is 3X the daily average. Unlike yesterday, when the flow was heavily concentrated in Jan 15 calls, the action is scattered today. Jan 20 calls are the most actives, with 1,114 traded. June 14 calls, July 13 calls, Jan 10 puts, and Jan 15 calls are seeing interest as well. 30-day ATM vols are up another 3 percent to 58, but yet no news to explain the two-day 15.9 percent spike in the beaten-down miner. Gold is off sharply, recently down $36 to $1540.50.

Dell (NASDAQ:DELL) is getting hammered for a $2.03 loss and, in early action Wednesday, is trading for $13.05 per share today after missing on earnings and offering a disappointing sales outlook. One player is apparently banking a hefty profit on a Jun 14 - 15 put spreads opened for 27 cents, 10000X a week ago. The spread recently traded at an average of 87 cents, 9000X.

Bearish Flow

SPDR Oil and Production (NYSEARCA:XOP) is off 85 cents to $48.06, as the energy-related names are being weighed down by falling oil prices Wednesday. Crude fell below $90 per barrel for the first time since the fall 2011 and was recently down $2.07 to $89.78 per barrel. Recent options trades on XOP include a Sep 43 - 47 put spread, sold at $1.35, 20000X, and probably rolls down in strikes after the 14.5 percent month-to-date skid in shares of the ETF. Open interest in the Sep 47 puts on XOP is 48,241 and the third largest in the product.

Implied volatility Mover

Implied volatility in Hewlett Packard (NYSE:HPQ) options is elevated after DELL's earnings disappointment and heading into H-P's earnings, due out after the closing bell. The stock is down 82 cents to $20.95 in brisk trading of 37 million shares. Options volume is running 6X the daily average, with 117,00 calls and 100,000 puts traded on the computer-maker. The top trade is a 19 - 21 put spread in the Weeklies for 75 cents, 5000X, and might have been opened to hedge the earnings event risk. Jun 20 puts and 22 calls are the most actives and 30-day at-the-money implied volatility in the options on the stock is up 23 percent to 50. The stock has recorded losses after each of the previous four quarterly earnings releases, for an average daily decline of 9.2 percent. The Weekly 21 straddle currently trades at 8 percent of spot, but the volatility skew hints at a larger move: One sigma post-earnings trading range is between $18.60 and $23.70.