Wednesday Options Recap

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Includes: AA, ADI, DE, HPQ, IP, NTR, RMBS, SFD, SQNM, WFC
by: Frederic Ruffy

Sentiment

Stocks opened lower on weakness in overseas markets along with cautious earnings guidance from HP (NYSE:HPQ) and Deere (NYSE:DE), but the major averages have erased early losses and are trading higher late Wednesday. With no economic data scheduled for today, the focus was on overseas markets Wednesday morning. Shanghai's Composite Index lost 4.3 percent and is down roughly 20 percent since August 4 amid concerns officials in Beijing aren't doing enough the help the credit markets and the economy.

Markets were broadly lower across the Asia/Pacific and in Europe before the exchanges opened in New York. Meanwhile, Dow component HPQ was under pressure on cautious earnings guidance. Deere (DE) fell on earnings news as well.

However, unlike Monday, the selling never gathered any momentum and a rebound in some of the commodities seemed to help lift the major averages heading into midday. Energy-related names strengthened after crude oil reversed early losses. Crude oil is up $3 to $72.19 after weekly data showed a big draw in crude stockpiles. Gold gained $3.70 to $942.90 an ounce.

The Dow Jones Industrial average hit a low of 9,132, but battled back to a high of 9,313. The Dow is up 52 points heading into the final hour of trading. The CBOE Volatility Index (.VIX) is up .46 to 26.64. Trading in the options market is active, with approximately 5.3 million puts and 5.7 million calls traded so far (a ratio of .94, compared to a 22-day average of .81.)

Bullish Flow

Sequenom (NASDAQ:SQNM) saw a spike in morning trading and hit a high of $5.14. Shares are now up 30 cents to $4.97 and investors are showing interest in Aug and Sep 5 calls, with a combined 4,100 traded and about two-thirds of the volume hitting ask-side. Implied volatility (average) is elevated and moving higher, up +7 to 108 percent.

Alcoa (NYSE:AA) is down 53 cents to $12.39 and AA Jan10 calls at the $15 strike are seeing interest for a 2nd day. Open interest in the contract increased by 19.4K to 44.9K yesterday and the top trade was 15K contracts above the asking price for $1.12. Then, another big print this morning, after 25K were bought for 98 cents. 29K contracts now traded.

Bearish Flow

International Paper (NYSE:IP) is down 25 cents to $19.52 and Jan11 10 - 20 put spread trades 2000X. Looks like the investor paid $4 and is possibly rolling up in strikes (selling to close the 10s and buying to open 20s) or opening a new spread with a possible $6 pay-off if IP returns to $10 per share or less by Jan 2011 options expiration.

Implied Volatility Movers

Rambus (NASDAQ:RMBS) calls are busy and implied volatility is moving Wednesday. RMBS is up $1.28 to $18.56 and 71K calls traded, compared to 16K puts. Implied volatility (average) is ripping higher along with Rambus shares–up to 93.5 (+8.7, or 10.2 percent).

Implied volatility is also higher in Potash (POT), Smithfield Foods (NYSE:SFD), and Wells Fargo (NYSE:WFC). Meanwhile, implied volatility is lower in H-P (HPQ), Deere (DE), and Analog Devices (NASDAQ:ADI).