Monday Options Recap

Includes: ARNA, EWY, TXN
by: Frederic Ruffy


Stock market averages gave back early gains, as the focus shifts from Spain to Greece. Spain's 100 billion euro bailout announced Sunday had largely been discounted in the financial markets ahead of the weekend after the S&P 500 scored its best weekly gain so far in 2012. A "buy the rumor, sell the news" type reaction was obvious on Wall Street and now investors wait for June 17 Greek elections as the next major news item from the EU. Italian and Spanish bond yields are ticking higher. EUR/USD is testing1.25. Will the "Grexit" trade resurface later this week, or has that news largely been discounted as well? Time will tell. In the US, there are no economic reports or earnings of significance to drive the action. So volumes are very light and cautious trading returned. The Dow Jones Industrial Average erased early gains and trading has been choppy throughout most of the session. Heading into the final hour, the Dow is now down 68 points and probing session lows. The NASDAQ lost 28 points. CBOE Volatility Index (.VIX) hit a morning low of 19.63, but is now up 1.22 to 22.45. Options volume is running about 70 percent the recent average daily, but will pick up later this week heading into the Quadruple Witch expiration. 5 million calls and 4.9 million puts traded so far.

Bullish Flow

Arena Pharmaceuticals (NASDAQ:ARNA) is up 56 cents to $7.18 and new 52-week highs in active trading of more than 16 million shares. 35,000 calls and 5,535 puts traded on the stock, including a 3X4 July 7 - 8 call ratio spread, in which 2,866 Jul 7 calls were apparently bought on the biotech at $1.52 and 3,821 Jul 8 calls sold at $1.05. It might be a position adjustment, as open interest is sufficient to cover and ARNA has rallied nearly 100 percent since the FDA voted in favor of its fat pill on May 11. Nevertheless, implied vols are up another 13.5 percent and still elevated at 134. No news on the stock today, but the high vols and volume seem to reflect expectations for additional headlines in the days/weeks ahead.

Bearish Flow

A bearish spread was initiated in the iShares South Korea Fund (NYSEARCA:EWY) after President Lee Myung Bak over the weekend put North Korea on notice that his government is ready for swift and powerful retaliation to any military provocation from the North. Tensions between the North and the South have been escalating since Kim Jong Un succeeded his late-father Kim Jong II six months ago. The North Korean dictator has threatened to turn Lee and his government into "ashes in three or four minutes." Now, the world watches to see if North Korea will conduct a nuclear test after its attempted rocket launch flopped in April. North Korea on Saturday denied it was conducting the test.

An interesting trade in EWY this morning seems to reflect concerns about the risks of a very steep slide in South Korea's equity markets. In morning action, with shares up 20 cents to $53.57, a Jan 25 - 31 - 42 put butterfly spread was apparently bought on the ETF for $1.20, 2000X to open, on AMEX. The investor sold 4,000 of the 31s for the body at 45 cents each and bought the 25s (for 20 cents) and 42s ($1.9) for the wings. The "sweet spot" of the butterfly is at $31 per share and 42.1 percent below current levels.

The spread can be viewed as buying a Jan 31 - 42 put spread for $1.45 and selling the Jan 25 - 31 put spread at 25 cents. It's an example of a "modified" or "unbalanced" fly because the first leg of the spread is 11 points apart. The second leg is 6 points. Consequently, if shares fall below $25, the net gain is $5, minus the debit, or $3.80. The debit is at risk if EWY holds above the upper wing and the position is left open through the expiration. It's an example of a "tail risk" trade - very high risk and reward. The downside breakeven at expiration is $40.80 per shares (higher strike minus debit), or 23.8 percent below current levels.

Implied volatility Mover

Bearish flow is detected in Texas Instruments (NYSE:TXN) ahead of this afternoon's mid-quarter update. 10,000 puts and 1,550 calls traded on the chipmaker. Shares are down 42 cents to $28.1 on relatively light volume of 4.4 million (6.75 million shares is the expected). Meanwhile, the options flow has been in smaller lots and includes a multi-exchange sweep of 2700 Jun 27 puts at the 12-cent asking price. Jun 31, Jul 21, Jul 23, Jun 28 and June 22 puts are the next most actives and 30-day ATM vols are up 12 percent to 30. Shares performed well last week (+5.6%), but are down 12 percent since earnings were reported on 4/23.