Monday Options Recap

by: Frederic Ruffy


Stocks opened lower, but battled back in morning trading and market action has turned mixed late-Monday. Economic data was in focus early after the NY Empire State Index, a gauge of regional manufacturing activity, showed an increase to 7.10 in August, from 5.08 in July and less than the 7.50 reading that economists had predicted. On an encouraging note, the index for employment included within the broader index rose to 14.29 from 7.94. A bit later, separate data showed the NAHB Index of homebuilder sentiment falling to 17 month lows of only 13 in August, down from 14 the month before and also below economist estimates of 14. Yet, although the data disappointed and the Dow Jones Industrial Average fell in morning trading, the initial decline was orderly and the early losses had been erased by mid-morning. The major averages were in positive territory midday and are trading mixed heading into the final hour. The Dow is now off 16 points, but the NASDAQ added 6.5. The CBOE Volatility Index (.VIX) lost .24 to 26. Overall options volume is on the light side, with about 5.2 million calls and 3.9 million puts traded so far.

Bullish Flow

Bonds are bid and both the iShares Long-term Bond ETF (NYSEARCA:TLT) and the ProShares UltraShort Lehman 20+ Treasury ETF (NYSEARCA:TBT) are seeing increasing options action Monday. The benchmark ten-year is up 21/32nd and its yield has fallen to just 2.59 percent. Investors are turning to Treasury notes and bonds, as the economic data disappoints, equities falter, and the Fed sits ready on the sidelines to buy more bonds. In TLT, shares are up $2.21 to $104.50 today and options volume is 2.5X the average daily, with 24K calls and 21K puts traded. In TBT, which moves twice the inverse to TLT, shares are down $1.48 to $32.70 and options volume is 2X the average daily, with 44K calls and 18K puts traded. Overall sentiment seems mixed, but there seems to be at least a few traders looking for a correction in Treasurys and buying calls on the TBT. The fund is now 34 percent below levels seen in early April and, after today’s dip, has suffered a three-week 12.4 percent slide.

From Steve Smith: Oracle (NYSE:ORCL) sees notable trade as one strategist seems to think last week’s 7.5% decline in the software maker was overdone and is using a risk/reversal to establish a bullish position. The transaction involved the purchase of 10,000 of the Jan. $25 calls and the sale of the same number of the Jan. $19 puts for a 17c net debit.

Bearish Flow

Corinthian College (NASDAQ:COCO) puts are busy for a second day. Open interest in COCO Aug 6 puts increased by 12.2K following a day of active trading Friday. Today, shares are off $1.71 to $4.95, as the education names (APOL, STRA, DV, CECO) are reeling this morning on news the Department of Education is proposing new regulation that would penalize for-profit education companies for graduating students with high debt loads. 2,800 Aug 6 puts traded so far, with some players likely closing positions opened Friday now that the contract is $1.05 in-the-money.

Implied Volatility Mover

Dynegy (NYSE:DYN) is up 14 cents to $4.67 and calls remain actively traded after Blackstone said Friday they’re looking to buy the power producer for $4.50 per share in cash. Judging by the fact that shares are 17 cents above the proposed offer, seems that some investors are looking for a higher bidder to emerge. Meanwhile, 45K Dec 5 calls have changed hands, including a buyer of 9800 at 20 cents each. Implied volatility is down 16 percent, but in the mid-40s and not low enough to suggest that the deal is a lock. In other words, IV still seems to reflect some uncertainty about the future of DYN.

Unusual Volume Movers

Bullish flow detected in General Mills (NYSE:GIS) with 31522 calls trading, or 8x the recent average daily call volume in the name.

Bullish flow detected in GT Solar International (SOLR) with 2051 calls trading, or 9x the recent avg daily call volume in the name.

Bullish flow detected in Northern Trust Corp (NASDAQ:NTRS) with 7162 calls trading, or 2x the recent avg daily call volume in the name.

Increasing options volume is also being seen in Devry (NYSE:DV), Corinthian Colleges (COCO), and McDermott (NYSE:MDR).

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