Friday Options Recap

by: Frederic Ruffy

Sentiment

With no economic data or earnings of significance to guide trading, stock market averages are holding modest gains in slow trading ahead of the weekend and after the steep losses suffered the day before. JP Morgan (NYSE:JPM) shares are up 2 percent and helping the Dow Jones Industrial Average recover some of Thursday’s 250-point plunge. As had been anticipated, Moody’s lowered their ratings on more than a dozen banks yesterday afternoon. Investors seemed to breathe a collective sigh of relief that the task is complete, and SPDR Financials (NYSEARCA:XLF) are up 10 cents to $14.30 despite the downgrades. In Europe, Spain’s IBEX rose 1.7 percent, but most equity markets suffered modest losses amid ongoing worries about the region’s banking system. Crude oil has battled back to gain $1.87 to $80.07 per barrel, and gold has erased early losses, now up $2.5 to $1568 an ounce. On Wall Street, the Dow Jones Industrial Average is up 57 points and the NASDAQ has added 20. CBOE Volatility Index (.VIX) is off 1.71 to 18.37 amid slowing volumes in the options market. 4 million calls and 4.4 million puts traded so far.

Bullish Flow

Apple Computer (NASDAQ:AAPL) adds $1.49 to $579.16 and the nine most active options on the stock (during the first thirty minutes of trading) are Weeklys that expire after today. Near-the-money 580 calls top the list. More than 12,000 traded. Out-of-the-money, 575 puts and 585 calls are the next most actives. Of the 86,000 contracts traded in Apple so far, 56,000, or 64 percent, are in the expiring Weekly contracts and another 10,000, or 10.5 percent, are in the Weeklys expiring on June 29. The Weekly 6/22 580 straddle is trading for roughly $4, and the Weekly 6/29 for $14/20. Implied volatility in Apple options is not much changed, around 24 percent, and in the 10th percentile of the 52-week range of 53 (10/1) and 17 (2/3). Volumes might begin to pick up in early July, as focus begins to shift to earnings (expected around July 24). Apple shares rallied 9 percent to $610 when earnings were last reported on 4/25.

Bearish Flow

The largest trades today are large blocks of July puts on sector funds and appears to be part of large hedging strategy. SPDR Industrials (NYSEARCA:XLI) is off 7 cents to $34.55 and failing to rebound from yesterday's 2 percent slide. One player seems to be bracing for further losses, as a 42000-contract block of July 33 puts trades on the ETF for 34 cents per contract on ISE. A customer bought to open, according to ISEE. A separate 22000-lot of July 32 puts traded on XLI for 19 cents on ISE and was also an opening buyer. XLB is off a penny to $34.01, and 45600 Jul 32 puts traded for 31 cents on ISE, also an opening buyer. SPDR Oil and Production Fund (NYSEARCA:XOP), which sank 5.3 percent yesterday following the 4 percent drop in crude, is up 15 cents to $45.41 and a 27500-lot of July 44 puts trades on ETF for $1.45 on CBOE. SPDR Retail Trust (NYSEARCA:XRT) ticks 2 cents higher to $57.58 and 17,500 Jul 55 puts trades on the ETF for 78 cents on CBOE. SPDR Metals and Mining ETF (NYSEARCA:XME) slips 7 cents to $39.11 and an 8200-lot of Jul 38 puts trades for $1 on CBOE. iShares Real Estate ETF (NYSEARCA:IYR) is off 7 cents to $61.56 and a 5400-lot of Jul 57 puts trades on the fund for 34 cents on AMEX.

Implied volatility Mover

Arena Pharmaceuticals (NASDAQ:ARNA) has seen a steady increase in options activity during the past two weeks heading into a June 27 PDUFA date for the biotech’s obesity drug Lorcaserin. Optimism has been riding high, and after the 73.8 percent surge in shares on May 11 following an FDA committee vote 18-4 in favor of the drug, shares rallied another 83.6 percent through yesterday. The stock then hit a 52-week high of almost $12 per share this morning, before seeing a violent round of profit-taking and falling to a morning low of $7.80.

ARNA is now down $1.72 to $9.96 on heavy volume of more than 20 million shares. 108,000 calls and 38,000 puts now traded in the name, which is 2.5x the daily average. Of that, 56 percent is in the July term and calls with strikes ranging from 10 to 17 are the most active. The July term also has the most open interest, totaling 38 million contracts. The largest increases in open interest over the past 10 days have been in the July 11 and 15 calls. Meanwhile, implied volatility in ARNA options is up 24 percent and elevated at 220, but still below the levels seen prior to the May 11 FDA news, when IV in ARNA options had surged to nearly 400 percent. Wait until next week!

Unusual Volume Movers

Bearish activity detected in Vivus (NASDAQ:VVUS), with 12663 puts trading, or 5x the recent average daily put volume in the name.

Bearish activity detected in Life Technologies (NASDAQ:LIFE), with 3763 puts trading, or 39x the recent average daily put volume in the name.

Bearish activity detected in OCZ Technology (NASDAQ:OCZ), with 2121 puts trading, or 6x the recent average daily put volume in the name.

High options volume is being seen in JC Penney (NYSE:JCP), Harvest Natural Resources (NYSE:HNR), and iShares MSCI EAFA Fund (NYSEARCA:EFA).