Monday Options Recap

by: Frederic Ruffy


Steep losses across eurozone equity markets set the table for morning weakness on Wall Street and there have been no meaningful rally attempts through afternoon trading Monday. Italy’s MIB Index lost 4% and paced the decline across Europe amid ongoing anxiety about the debt crisis. In the U.S., the only economic stat of the day showed New Home Sales at a better-than-expected annual rate of 369K in May. The data had no market impact. Instead, the focus is on Europe ahead of a two-day meeting of EU leaders. The euro fell .7% to 1.278 and crude oil is off 59 cents to $79.17 per barrel. Flight-to-safety is obvious. Gold gained more than $17 to $1584.5 an ounce and the 10-year Treasury ticked 19/32nd higher and now yields just 1.61%. The Dow Jones Industrial Average was down 155 points and 38 points off session lows. With about an hour left to trade, the Nasdaq lost 58 points. CBOE Volatility Index (.VIX) 2.20 to 20.31. Trading in the options market reflects the cautious underlying tone. 4.7 million calls and 5.3 million puts traded across the exchanges so far.

Bullish Flow

Constellation Brands (NYSE:STZ) rallied $2.50 to $21.87 and hit a morning high of $22.21 in active trading of more than 11 million shares on reports AB InBev is in talks to buy Mexican beer-maker Modelo. The Wall Street Journal is reporting that InBev is near a deal to clinch the 50% stake in Modelo that it doesn't already own. Modelo was up almost 10% on the Mexican stock exchange. Meanwhile, STZ is rallying because the company exports Modelo beer products in the US under a Crown Imports joint venture agreement. There is speculation that Constellation would receive a cash payment from InBev for its stake in the joint venture - Bloomberg. STZ is up on the news and options order flow is bullish. 5,600 calls and 660 puts traded on the stock so far. July 22.5 calls are the most actives. 2,575 traded. The contract is 2.8% out-of-the-money and expiring in 25 days. August 25, August 22.5 and October 35 calls are the next most actives and 30-day ATM vols surged 50 percent to 44.5.

Bearish Flow

Twelve of the 15 most active options contracts Monday are put options on the SPDR 500 Trust (NYSEARCA:SPY). The Spiders are off $2.17 to $131.29 and, after big losses Thursday and today, are now unchanged month-to-date. Some players in the options market seem to be bracing for further losses this week, as Quarterly Jun 130 and Jun 126 puts, which expire after Friday, are the most actives. Volume in the Jun 130s is roughly 55,000 and nearly 50,000 Jun 126 puts changed hands. July 130 puts, July 128 puts and July 134 calls are the next most actively traded contracts across the US listed options market today. Yet, 85 million SPY shares traded today, which is only three-quarters the expected volume. While put volume is outpacing call activity in SPY trading by a ratio of nearly two-to-one, the total volume of 1.1 million puts and 533K shares is about 88% the typical volume for SPY through midday. Still, while volume is light, implied volatility in SPY options is up 16% to 19. In short, there are no signs of panic in the order flow, but the relatively high put volume and higher implied vols certainly reflect the increased anxiety levels that have resurfaced since Thursday.

Implied Volatility Mover

Implied volatility in Research In Motion (RIMM) options is moving back toward the 2012 highs, as shares fall to their lowest levels since late-2003. The Blackberry-maker is under fire today, falling 77 cents to $9.09 on heavy turnover of 27 million shares after Morgan Stanley downgraded the stock to UnderWeight from Equal Weight. Reports out this morning are also suggesting that RIM might break apart its handset and messaging businesses - Sunday Times. Trading in the options is heavy as well. 86,000 calls and 120,000 puts so far. July 10 puts are the most actives and are likely seeing some liquidating trades, as the contract is now in-the-money and has more than 60,000 contracts in open interest - which is the largest in the RIMM options. Other players appear to be taking fresh positions in July 8 puts. Bottom-fishers are possibly driving the flow in the Weekly 10 and 11 calls, which have both traded more than 10,000 contracts. At the same time, 30-day ATM implied volatility in RIMM options is up 28% to 79.5 and not far from the 2012 high of 82 set on March 29. Earnings come into focus Thursday afternoon.

Unusual Volume Movers

Bearish activity detected in Omnicare (NYSE:OCR), with 2,034 puts trading, or 8x the recent average daily put volume in the name.

Bullish flow detected in Sunoco (NYSE:SUN), with 7,111 calls trading, or 3x the recent average daily call volume in the name.

Bearish activity detected in Logitech International SA (NASDAQ:LOGI), with 2,876 puts trading, or 4x the recent average daily put volume in the name.

High options volume is being seen in TEVA, Time Warner (NYSE:TWX) and PBR.

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