Wednesday's Options Recap

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Includes: ARNA, FMCC, FNMA, LXK, MTXX, RAD, RDN, SQNM
by: Frederic Ruffy

Sentiment

Stocks struggled despite a round of mostly upbeat economic data Wednesday. A report released before the opening bell showed orders for durable goods increasing by 4.9 percent in July, which was better than the -1.3 percent in June and also ahead of economist estimates of 3.2 percent.

Later, thirty minutes into the trading session, a separate report showed new homes sales improving to an annualized rate of 433K in July, up from 384K in June and better than the 395K average economist forecast.

The major averages moved to session highs on the housing data, but the gains didn't last. Instead, the Dow Jones Industrial Average drifted quietly lower and spent the day in a narrow 97-point range Wednesday. The Dow is down 7 points heading into the final 50 minutes of trading. The CBOE Volatility Index (.VIX) is up .21 to 25.13. Trading in the options market is slow, but becoming a bit more defensive. Approximately 4.6 million puts and 4.6 million calls traded so far (a ratio of 1.00, compared to a 22-day average of .78.)

Bullish Flow

Sequenom (NASDAQ:SQNM) is up 51 cents to $5.52 and 18K calls traded, or 10X the number of put options. Trading is heavy in Sep 5, Sep 6, Sep 7.5, and Oct 6 calls. Directional sentiment based on the total order flow is 57 percent bullish — suggesting that bulls outnumber the bears by a modest margin Wednesday.

Lexmark (NYSE:LXK) is up 21 cents to $18.22 and 4,800 Oct 20 calls traded early, compared to open interest of 2,478. Looks like buyers driving the early flow, as 65 percent of those trades hit ask-side of the bid-ask spread.

Bearish Flow

Philadelphia-based title insurance company Radian (NYSE:RDN) is down 13 cents to $9.29 and traders are showing interest in January 2010 puts at the $2.5 line. 2,800 traded and nearly all hit ask-side. Existing open interest is 801, suggesting players are buying to open positions in these puts, which might be a type of "disaster insurance" since the contract is 72 percent out-of-the-money. Then again, RDN was trading below $2.5 as recently as July 23.

Implied Volatility Movers

Arena Pharmaceuticals (NASDAQ:ARNA) sits unchanged at $4.88 and an impressive 20.2K Oct 4 puts traded today. Meanwhile, average implied volatility in ARNA options is up to 156 (+6) ahead of data readouts on obesity drug lorcaserin some time next month.

Implied volatility is also higher in Rite Aid (NYSE:RAD), Sequenom (SQNM), and Radian (RDN). Meanwhile, implied volatility is easing in Fannie (FNM), Freddie (FRE), and Matrixx Initiatives (MTXX).