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Sentiment

Stock market averages are holding gains for a second day, as global equity markets rally on hopes for monetary stimulus. Japan's Nikkei rose 1.2 percent and helped pace an advance across Asia's equity markets after China's Central Bank lowered rates. Although the Bank of England left its monetary strategy unchanged, in the US, Fed Head Bernanke vowed that the Federal Reserve stands ready to take necessary action if needed. Bernanke fell short of telling Congress that another round of Quantitative Easing is in the cards. Nevertheless, the day after the Dow Jones Industrial Average rallied 287 points on the heels of soothing words from ECB President Mario Draghi and amid falling Spanish bond yields, hopes for accommodative policy and diminishing fears about the EU debt crisis are helping to lift stocks again Thursday. The Dow Jones Industrial Average is up 76 points. However, the tech-heavy NASDAQ has erased midday gains and is off 7 points. CBOE Volatility Index (.VIX) is off .63 to 21.53. Trading in the options market is active, but slowing from a very brisk pace seen early this morning. 7.2 million calls and 7.1 million puts traded across the exchanges so far.

Bullish Flow

Risk 13 cents to make 87 cents if JPM manages an 18% climb in the next 44days? Someone likes that bet, with nearly 30,000 July 38-39 call spreads being bought to open over the course of two hours in morning trading Thursday. While a move of almost 20 percent is a longshot, before the $2 billion surprise loss announced last month, shares had spent 2 months north of $40. Interestingly the lot sizes in today's spreads are relatively small, nothing above 1000 contracts, and 94% of the flow has executed on the electronic, anonymous ISE. Despite the low net price of only 13 cents for the spread, the premium outlay is approaching $400,000. ISE data shows the flow is marked opening for a firm account.

Bearish Flow

Lululemon (LULU) are off $6.17 to $63.85 following this morning's profit report. A few hours before the closing bell Wednesday, an investor bought 8,700 June 67.5 puts on the stock for $1.81 and sold 8,700 June 60 puts at 51 cents. The spread, for a $1.30 net debit, was bought 10,000X, according to a source on the exchange floor, for a total premium of $1.3 million. It was an opening play.

If bought, the June 60 - 67.5 put spread on LULU is a bearish position that makes profits if the stock heads lower. The potential profit is equal to the difference between the two strikes minus the debit paid, or in this case $6.20. The downside breakeven at expiration is equal to the higher strike minus the debit, or $66.20. The entire debit is at risk if LULU holds above $67.5 and the position is left open through the expiration.

With LULU trading for $63.85, the spread is obviously a huge winner. Since the spread was initiated the day before earnings and with June options that expire at the end of next week, the position was probably a play on earnings. About 2,400 contracts traded in both the Jun 67.5s and 60s today. So the position has not yet been offset and the spread has widened to $3.30, or an unrealized profit of $2 million. Not bad for one days "work". That's why we monitor options order flow.

Implied volatility Mover

Overall volumes are up, but volatility is easing again Thursday. 2.7 million calls and 2.5 million puts traded across the exchange so far. The projected volume of 20.6 million is on pace with Friday's tumultuous trading day when 21 million contracts changed hands and overall volume totals hit their highest levels since May expiration Friday. Meanwhile, VIX is down .73 to 21.43 and now 6.3 points, or 22.7 percent, below Monday morning's multi-month high of 27.73.

Source: Thursday Options Recap