Wednesday Options Recap

Includes: CAGC, EFA, KSS, MCD
by: Frederic Ruffy


Stocks overcame early weakness and are trading mixed late Wednesday. The table was set for losses on Wall Street at the open after the euro and European equity markets saw a day of weakness amid renewed worries about the European Debt Crisis. Rising debt levels in Ireland seem to be the primary source of the renewed angst and anxiety. Consequently, for the first time in three weeks, the euro dipped below 1.37 on the buck and the happenings overseas seemed to overshadow the day’s domestic news, which included a better than expected Weekly Jobless Claims data. The report showed a decline of 24,000 to 435,000. Economists were looking for a drop of 9,000. The Dow Jones Industrial Average wavered on the data, but found a floor mid-morning and traded mixed into midday. From there, trading has been choppy and uninspired. With 40 minutes left to trade, the Dow is down 5 points. The tech-heavy NASDAQ is up 11 ahead of earnings from Cisco, due at the close. The CBOE Volatility Index (.VIX) made a run back towards 20 early, but was recently down .30 to 18.78. Trading in the options market is a bit lighter than in recent days, with about 7.4 million calls and 5.8 million puts traded.

Bullish Flow

China Agritech (OTCPK:CAGC) is under fire. The company reported earnings and revenues that fell short of Street estimates after floods in the country hurt fertilizer demand. CAGC is off $3.05 to $12.40 and options volume is 3X the average daily. Interestingly, most of the volume is on the call side of the options chain. 5,500 calls/1,075 puts traded in CAGC so far. Nov 12.5, Dec 12, and Nov 15 calls are the most actives, as some investors seem to view the weakness as an opportunity to initiate bullish trades in CAGC. However, some of the flow also looks like selling/closing trades. Implied volatility is down 6.5 percent to 83.5.

The MSCI Europe, Asia, and Far East (NYSEARCA:EFA) exchange-traded fund has added 18 cents to $58.43 and one strategist pays a $4.65 for Jan12 55 – 65 call spread, 12500X (tied to 363K shares at 457.80). Looks like an opening play and a bet that shares will move to $65 (11.2 percent) or beyond by the January 2012 expiration.

Bearish Flow

McDonald’s (NYSE:MCD) shares gave up 21 cents to $79.10 and options volume hit 2.5X the average daily yesterday. January 75 puts saw the most volume. 18,760 traded. About three-quarters traded at the ask and open interest increased by 10,142 to 15,436, which is now the third largest position in the name. Looks like bearish trading on the fast food chain and comes after San Francisco approved a new law Tuesday that restricts the practice of giving away toys with kids meals, unless the meals meet certain nutritional standards.

Implied Volatility Mover

From Henry Schwartz. Near term Kohl's (NYSE:KSS) option pricing indicates an expected daily standard deviation nearly twice as large as that of a typical non-earnings day. The 4 point implied volatility difference between Nov and Dec equates to an earnings event standard deviation of 3.6%. There’s a 66% probability that KSS will stay within $2 of current $52 level.