Wednesday Options Recap

by: Frederic Ruffy


The Dow Jones Industrial Average is down 117 points and near its worst levels of the day late Wednesday. Trading was orderly until about 2:15 ET, and shortly afterward Fed's Hoenig stated that, with respect to low rates, the "extended period" language in the FOMC statement is no longer warranted. The comments come the day after the FOMC released minutes from a March 16 meeting that still contained the phrase.

The market slide gathered additional momentum at 13:00 after data on consumer credit showed surprise contraction of $11.5 billion in February, much worse than the $.7 billion economists had expected. Add to this a rise in Greek 10-year bond yields overnight, an earnings miss from Monsanto (NYSE:MON), weakness in energies, along with a very slow 2-month 12.1 advance for the S&P 500, and there is a noticeable uptick in volatility late Wednesday. The NASDAQ is down 17. With about 45 minutes left to trade, the CBOE Volatility Index was up .95 to 17.18. Trading in the options market is picking up, with about 7 million calls and 6 million puts traded so far.

Bullish Flow

BofA (NYSE:BAC) is up 16 cents to $18.65 and attempting to stage a 5-day 7.1 percent rally. In the options market, one player appears to be taking advantage of the recent strength to sell the May 16 – 18 call spread at $1.62 to buy the Aug 20 calls at 80 cents, 15000X. This might close a position in the spread now that both contracts are in-the-money and roll to a similar bullish position in the out-of-the-money call options that expire in August.

Aol (NYSE:AOL) saw a morning spike to $27.32 and is up 72 cents to $27.11 on reports it's considering whether or not to shut down its Bebo social networking site. It acquired Bebo for $850 mln two years ago. Shares are up on the news and options volume is running 5X the average daily. The top trade is 5000 May 29 calls at 40 cents on ISE, which is an opening customer buyer. 11,250 calls traded total, or 9X the recent average daily. Implied volatility is up about 3.5 percent to 31.0.

Bearish Flow

Massey Energy (NYSE:MEE) continues to see heavy trading, as shares probe session lows in afternoon trading. MEE is off $3.07 to $45.38 and has suffered a two-day 17 percent slide after an explosion at a W.Va. mine killed 25 workers. In a recent update, there are no signs of the other missing miners alive and still trapped inside the mine. The Washington Post has an article today stating the company violated hundreds of safety violations since 2005. Consequently, shares of the coal producer are still reeling and options volume is 6X the average daily. About 58K calls and 49K puts traded so far. April 48 and 50 calls are the most actives, with two-sided trades (about 49% Bid) seen in both contracts. Some players are bracing for additional downside in April 44 and 45 puts. Implied volatility is up another 2 percent to 56 today and up from about 53 before the disaster happened.

Implied Volatility Movers

Star Scientific (CIGX) saw a morning spike to $3.69 and was recently up 16 cents to $3.11 after announcing it has started collaborating with SRQ Bio on a treatment for Alzheimer's. In the options, April 3, 4, and 5 calls are seeing brisk trading. 15K calls and 850 puts traded total. Implied volatility remains elevated, up about 1 percent to 175.

Unusual Volume Movers

Palm (PALM) options volume is running 2X the usual, with 133,000 contracts traded and call activity representing about 74 percent of the activity.

Massey Energy (MEE) options activity is running 7X the usual, with 114,000 contracts traded and call volume representing 53 percent of the volume.

Best Buy (NYSE:BBY) options volume is running 2X the usual, with 102,000 traded and call volume representing 85 percent of the activity.

Unusual volume is also being seen in Monsanto (MON), Dell (DELL), and TiVo (NASDAQ:TIVO).