Wednesday Options Recap

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Includes: AAL, ACL, EWH, GERN, JOSB, MDVN, MOS, NKE, NOK, NTR, QQQ, SPY, UAUA
by: Frederic Ruffy

Sentiment

The major averages have been in a range and are mixed on a slow news day Wednesday. The Dow Jones Industrial Average struggled at the open and fell into negative territory after a 127-point rally Tuesday and following a disappointing jobs report from Automatic Data Processing.

Before the opening bell, ADP said that the US economy lost 169,000 jobs last month. Economists were expecting the report, which comes two days before the Labor Department releases its monthly jobs data, to show a loss of 160,000. While ADP's report includes private sector jobs, Friday's numbers consider both private and public workers. Economists expect Friday's numbers to show a loss of 120,000 and the rate of unemployed to edge up to 10.3 percent from 10.2 percent.

With not much other news to guide the market action, the Dow slipped on the jobs data and has traded in a narrow range throughout the remainder of the session. The industrial average is off 33 points heading into the final forty-five minutes of trading. The tech-heavy NASDAQ is up 5.9. Mixed trading has the CBOE Volatility Index (.VIX) slipping .66 to 21.26. Trading in the options market is light, with 4.45 million puts and 5.4 million calls changing hands so far (a ratio of .83, compared to a 22-day average of .80).

Bullish Flow

UAL Corp. (UAUA) is up 91 cents to $9.17 after Morgan Stanley upgraded the airline sector to Attractive, citing better earnings and liquidity projections for 2010. They upgraded UAL and AMR to Overweight from Equal Weight. In UAUA, options activity is running at 12X the expected for midday, including 12K puts and 15K calls. One player bought 2500 Dec 8 puts at 25 cents each, possibly hedging a position in shares. A block of 3500 Jan11 2.5 puts at 30 cents on PHLX is possibly a hedge or a premium seller (hit mid-market). Dec and Jan10 $9 and $10 calls are seeing action as well. Implied volatility (average) is up to 90, from about 88.5 late Tuesday.

Mosaic (NYSE:MOS) calls were active Wednesday morning, as the company kicked off a presentation at the Citigroup Basic Materials Conference, which started about 10 minutes ago (10:45). Shares opened higher and are trading up $3 to $60.17 amid relative strength in the fertilizer names (POT, AGU, CF, IPI, TRA). In the options, 31K calls and 10K puts traded on MOS, or about 8X the expected. Jan10 75, Dec 65, Jan10 70, Dec 60, and Dec 55 calls are the most actives. The top trade is a block of 5000 Jan10 75 calls bought at 55 cents (adjusted) against a position in MOS shares at $60.15. The next biggest trades: 2000 Dec 45 - 50 put spreads apparently bought at 20 cents, 2000X.

Bearish Flow

US Airways (LCC) is up 19 cents to $3.88 amid gains in the airline sector (see 9:08 UAUA color). In the options market, LCC volume is running 6X the average daily after one player bought 10,000 Jan 2.5 puts at 13 cents apiece, according to a floor contact. Looks like the trade was repeated again because total volume in the Jan 2.5 puts now more than 20K vs. 16K in open interest. Jan 4 puts are seeing interest as well, with more than 5000 traded (79 percent ask-side). Average implied volatility in LCC is elevated at 172, but not much changed since yesterday.

Implied Volatility Movers

Implied volatility is falling in the PowerShares QQQ (QQQQ), which added 7 cents to $44.08 amid quiet trading in the tech sector Wednesday. The QQQ Volatility Index (QQV), which tracks the expected volatility priced into QQQQ options, is down a point to 19.70.

Implied volatility is also lower in Citi (NYSE:C), Jos A Bank (NASDAQ:JOSB), and the S&P 500 (SPX). Meanwhile, implied volatility is higher in Alcon (NYSE:ACL), UAL (UAUA), and Geron (NASDAQ:GERN).

Unusual Volume Movers

Potash (POT) is seeing 2X average daily trading volume, with 107,000 contracts traded and call volume representing 65 percent of today's activity.

iShares Hong Kong Fund (NYSEARCA:EWH) is seeing 43X average trading volume, with 17,000 contracts traded and put volume representing 99 percent of today's trading activity.

Medivation (NASDAQ:MDVN) is seeing 11X normal trading volume. 53,000 contracts have traded, with puts representing 58 percent of today's volume.

Unusual volume (two times or more than normal average volume) is also being seen in Nike (NYSE:NKE), Alcon (ACL), and Nokia (NYSE:NOK).