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Sentiment

Volumes are remarkably light for a Wednesday before Quadruple Witch expiration, but the flow clearly reflects a cautious underlying tone following this morning's poor Retail Sales (-.2 percent) and PPI numbers (-1 percent). 4.3 million calls and 4.8 million puts traded so far (13:45 ET). Seven of the ten most active options contracts are puts on the SPDR 500 Trust (NYSEARCA:SPY). The S&P 500 has wavered in and out of positive territory and is exactly unchanged. Spot volume across the stock exchanges is 3.3 billion shares and well off (about 72 percent) the expected pace of 4.6 billion.

Activity is likely to pick up tomorrow heading into the expiration and as players brace for the next shoe to drop in the EU debt crisis. CBOE Volatility Index (.VIX) is ticking 1.25 points higher to 23.34. Safe havens are benefiting. Gold gained another $6 to $1620 and the ten-year Treasury note rose 9 ticks to session highs on in-line auction results. Yet, the euro is strengthening and now up .8 percent to test 1.26 on the buck. Crude is little changed at $83.20.

Bullish Flow

Dendreon (NASDAQ:DNDN) adds 49 cents to $6.74 on high volume of 8.6 million shares and options on the biotech are busy Wednesday as well. 14,000 calls and 3,870 puts so far. The top trade is up 1876 July 6 puts traded on the 36-cent bid and possibly a closing seller. The next biggest trade is a 1000-lot of Jun 7 calls on the 15-cent bid. 5,669 now traded, making it the most active in DNDN. Beyond that, the flow has been in smaller lots. June 6, July 7, and Jun 8 are also among the most actives and 30-day ATM Vols are up 16.5 percent to 90.5. A firm called Summer Street Research had positive comments about Dendreon today. The analysts raised the stock to Buy, with an $18 price target, saying DNDN is down 80 percent from last year when the company warned that Provenge was slow to be adopted, but margins are likely to improve thanks to new management.

Bearish Flow

A vertical put spread is plain vanilla strategy that can be initiated as a hedge or to make an outright bearish bet on the underlying stock, ETF, index, or futures contract. An example surfaced today in the iShares Australia Fund (NYSEARCA:EWA) and I'll highlight the trade as an example of this 101 strategy. -- sometimes called the bear put spread.

EWA is off 21 cents to $21.28 and an Oct 18 - 20 put spread trades on the ETF for 65 cents, 3125X, to open. In this strategy, the investor apparently bought 3125 October 20 puts on the the fund for $1.31 and sold 3150 October 20 puts at 66 cents. EWA shares are up 4.4 percent since Jun 4, when the ETF was probing an established support area around $20 per share. On June 5, EWA benefitted from news of a rate cut from Australia's central bank and, on June 6, was also helped by data that showed Australia's economy growing twice more than expected.

The October 18 - 20 put spread on EWA probably reflects the view that the recent rally won't last, the support area won't hold, and shares will be trading south of $18 (~15.4%) through the October expiration. The best possible gain from a bear put spread is equal to the difference between the two strike prices, minus the debit, and happens if shares are trading at the lower strike or less a the expiration. At that point, the spread is equal to 2 and the profit is 2 minus .65, or $1.35. So, the investor is risking .65 to make 1.35, a ratio of about two-to-one. The debit is at risk if shares hold above the $20 strike (~5.9%) and the position is left open through the expiration. However, the spread can be offset (sold-to-close) at any time prior to expiration. The breakeven at the expiry is equal to the higher strike, minus the debit. In this case, the spread breaks even at 19.35.

The vertical put spread is a limited risk-reward strategy that can be used to hedge a stock position or make outright bearish bets on the underlying. The deeper out-of-the-money the spread, the greater the potential risk-reward and the lower probability of success. It's a strategy that we see initiated relatively often in today's volatile markets.

Implied volatility Mover

Halcone Resources (NYSE:HK) drifts down 34 cents to $10.91 on very light turnover of 350K shares, but put volume is running 8X the daily average and implied volatility in the options on the Houston, TX oil and gas company is up 23 percent to 69.5. 4,960 puts and 320 calls traded in HK. July 9s, which are 11.7 percent OTM and expiring in 37 days, are the most actives. 3,045 traded. July 10 and 11 puts are the next most actives. No news on the ticker today. The recent trend in the underlying has been sideways in recent months and HK is at the same levels today as late-January. But higher put volume and increasing implied volatility seems to reflect concerns about a possible mover lower in the weeks ahead.