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Sentiment

A rough day on Wall Street, as poor economic data and worries about the banking industry conspired to send stock prices broadly lower. While the latest jobless claims were a bit less than expected and May Existing Home Sales in-line with economist estimates, the Philadelphia Fed Survey was a shocker. The gauge of regional manufacturing activity fell to -16.6 in June, from -5.8 last month and well below expectations of .-2%. A decline in China’s PMI for June, to its lowest levels since March 2009, added to worries about the global economy. Meanwhile, news agencies are reporting that Moody’s will release downgrades of major banks later today. Plummeting commodities prices, including a 4% loss in crude to less than $79 per barrel along with a drop of nearly $50 in gold, added to the pessimism about the global economic backdrop. The Dow Jones Industrial Average is down 220 points and 24 points off session lows. The Nasdaq gave up 65 points. CBOE Volatility Index (.VIX) rallied 2.62 points to 19.86 amid decidedly cautious trading in the options market. 7.6 million puts and 6.8 million calls traded across the exchanges so far.

Bullish Flow

Cisco (CSCO) is off 42 cents to $17.09, falling to session lows, and giving back the gains recorded yesterday after BMO Capital raised its rating on the stock to Outperform from Market Perform. Midday options trades on Cisco today are interesting, as 22,000 CSCO August 18 calls traded for 45 cents on ISE. A customer bought 30,000 contracts total, to open, according to ISEE. It appears tied to 1.14 million shares at $17.32 and to be targeting a move beyond $18 (4%) through the August expiration (57 days). Shares are down today, but up 7.1 percent over the past three weeks.

Bearish Flow

Exxon Mobil (XOM) is off $2.47 to $82.50 after crude lost more than $2.50 and fell to less than $79 per barrel Thursday. Crude is now at its lowest levels since early-October and has plummeted nearly 30% since late-April. One player in the options market made a well-timed bet in anticipation of weakness in XOM this morning. It’s a plain vanilla put spread that’s a 65% winner in just a couple of hours. Let’s take a closer look at the strategy:

In morning trading Thursday, a July 80 – 85 put spread was apparently bought on the stock this morning for $1.30, 10000X on PHLX. In this position, 10,000 July 85 puts was bought for $1.68 and 10,000 July 80 puts sold for 38 cents, and a $1.30 net debit was paid. Shares were trading for $84.55 at the time and the spread seems to be targeting a move to $80 or less through the expiration, or a 5.4% drop over the next 29 days. The breakeven at expiration is equal to the higher strike minus the debit, or $83.70, which represents a decline of 1.3%. The entire debit is at risk if shares hold above $85 and the position is left open through the expiration.

A vertical put spread is a popular strategy for making a bearish bet on the stock or to hedge a position. It is similar to buying puts, but selling a lower strike put helps mitigate some of the risk from time decay. The profits are limited by the downside puts as well. The max profit happens if shares fall below the lower strike. At that point, the payoff is equal to the spread minus the debit because you will be put the stock for $80 (assigned on the 80s), but you can sell (put) it to someone else at $85 per share. However, the position can be closed out at any time prior to the expiration. XOM fell to $82.50 and the XOM July 80-85 put spread can be sold at $2.15, for a 65% (or $850K) gain on this mornings trade.

Implied Volatility Mover

Bed Bath and Beyond (BBBY) is off $10.83 to $62.84 on heavy volume of more than 7 million shares Thursday morning after the retailer reported an 89-cent per share first quarter profit yesterday afternoon. The EPS number was a nickel better than Street estimates, but revenues fell short of expectations and the company lowered guidance for the second quarter. The stock is reeling on the results and options on BBBY are heavily traded. 13,000 calls and 20,000 puts so far. The action has been in smaller lots. The top trade is a Weekly 65 – 75 put spread at $9.80, 470X, and possibly liquidating position, as it appears that a seller initiated the trade. Both contracts are now in-the-money and also expiring after tomorrow. Interestingly, out-of-the-money Weekly and July 65 calls are the most actives and seeing some activity at the offer, suggesting that some investors might believe today’s 15% drop in the underlying is overdone. Implied volatility in BBBY options is down 12% to 30 now that the earnings event risk has passed.

Unusual Volume Movers

Frontier Communications (FTR) is seeing 12X the daily average volume, with 62,000 contracts traded and put volume accounting for 96% of the volume.

Onyx Pharmaceuticals (ONXX) options volume is 9X the daily average, with 50,000 contracts traded and put volume representing 63% of the flow.

Aetna (AET) options activity is 3X the average daily, with 42,000 contracts traded and call volume accounting for 63% of the flow.

High options volume is being seen in Anadarko Pete (APC), Arena Pharmaceuticals (ARNA) and iShares Silver Fund (SLV).

Source: Thursday Options Recap