Midday Flow Report: WaMu and Elan Show Activity

by: Frederic Ruffy

Sentiment has improved noticeably in the options market midday Tuesday. After rallying 1.32 points to 24.23 Monday, the CBOE Volatility Index (.VIX) is down 1.31 to 22.91 midday Tuesday and now not much changed on the week. Meanwhile, approximately 3.8 million call options and 3.2 million puts traded across the US options exchanges during the first half of Tuesday’s trading session. 

Bullish Flow

Washingon Mutual (NYSE:WM) long term options are active on spread trading. Shares edged down 2 cents to $3.92 and much of this morning’s activity involved January 2010 calls with the 5 and 10 strikes. At 10:42 Eastern time, 20,000 of the 5s traded offerside for $2.00 a contract and the same number of 10s bidside for 95 cents. The action appears to be opening of a substantial bull call spread. If so, this strategist is betting on a rebound in WM and is paying $1.05 to enter the spread, with a potential payoff of $3.95 if the stock rallies up to $10.00 a share or beyond by January 2010 options expiration.

Elan Corp. (NYSE:ELN) is seeing action ahead of this afternoon's presentation about a midstage study data on its Alzeimer's disease treatment bapineuzumab. The August 35 calls, August 40 calls, and August 25 puts are the most actives. At approximately 9:45 Eastern time, 10,000 of each traded on the PHLX. Sources on the exchange tell WhatsTrading.com that the action was by one player who bought the 35/40 call spread and sold the same number of 25 puts. The trade was also tied to a block of ELN shares, which suggests the strategist in question was possibly taking on a substantial and bullish trade ahead of the news.

Titanium Metals (TIE) is seeing double its normal trading volume on call buying. The stock jumped 55 cents to $11.20 on talk the company could be taken private. 7,700 TIE calls traded midday, compared to just 73 puts. The August 12.5 calls are the most actives, with 82 percent of today's volume trading offerside.

The Select Sector Consumer Discretionary Fund (NYSEARCA:XLY) is seeing bullish order flow on the heels of better-than-expected consumer confidence numbers. According to the Conference Board's Index, consumer confidence rose in July, to 51.9 from 51 the month before. Economists were looking for a decline to 50.00. The strong numbers helped ignite a rally in consumer discretionary stocks.

The XLY, which is an exchange traded fund that holds companies like McDonald’s (NYSE:MCD), Home Depot (NYSE:HD), and Time Warner (NYSE:TWX), is up 62 cents to $28.38 and some players are looking for the short-term strength to continue. As evidence, more than 16,000 of the August 29 calls trading. With 90 percent of that volume trading offerside and open interest of just 2,288 contracts, the action appears to be opening buy orders and therefore bullish trading in anticipation of further gains for the XLY in the short-term.

Bearish Flow

XL Capital (NYSE:XL) is seeing bearish order flow after Moody’s said it was reviewing the company for possible downgrade. XL is trading down $1.22 to $17.15 a share and August 17.5 calls are the most actives. 4,630 contracts have traded, with 80 percent of today’s volume trading bidside. Meanwhile, 2,951 of the October 15s have traded, with 85 percent trading offerside. Action is also picking up in the October 20 and 12.5 put options. In short (pun!), call selling and put buying suggests that players remain bearish on XL even after today’s 6.6 percent decline.

Today’s top trade in the ETF market was an order of 40,000 PowerShares NASDAQ 100 (QQQQ) January 40 puts traded offerside, or $1.50 a contract, at 9:40 Eastern time on the AMEX.

Implied Volatility Movers

Merrill Lynch (MER) implied volatility is easing despite ongoing volatility in the share price. The stock hit a low of $22.00 a share early, its lowest levels in almost ten years, after the firm said it was selling $30 billion in mortgage related securities and $8.5 billion in a stock offering. However, MER battled back to $23.58 midday and implied volatility in the options market eased substantially. In the 22.5 and 25 strikes, for example, IV is around 95 percent and down more than 40 percent on the day. So, despite the weakness in the share price, the options market seems to be viewing recent developments with a bit less anxiety and or pessimism.

Implied volatility is also falling in LCA Vision (NASDAQ:LCAV), Freddie Mac (FRE), Fording Canadian Coal (FDG), XL Capital (XL), and ev3inc. Meanwhile, vols are on the rise Spectranetics (NASDAQ:SPNC), MarineMax (NYSE:HZO), and United Rentals (NYSE:URI).

Unusual Volume Movers

AK Steel (NYSE:AKS) is seeing double its trading volume with 42,000 contracts traded and call options representing 64 percent of today’s volume.

Gap Stores (NYSE:GPS) is seeing four times normal trading volume, with 21,000 contracts traded and call options representing 95 percent of today’s volume.

Ambak Financial (ABK) is seeing double its normal trading volume, with 31,000 contracts traded and 97 percent of today’s volume trading is call options.

Unusual volume (two times or more than normal average volume) is also being seen in Kraft Foods (KFT), Amgen (NASDAQ:AMGN), Comcast (NASDAQ:CMCSA), Ciena (NASDAQ:CIEN), Computer Sciences (NYSE:CSC), and Crown Castle (NYSE:CCI).