Tuesday Options Recap

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Includes: AA, BAC, LFT
by: Frederic Ruffy

Sentiment

Stocks opened sharply lower and remain in the red late-Tuesday. Equity markets fell across Asia and Europe ahead of the opening bell on Wall Street amid worries about the Japanese nuclear crisis. The rating for the disaster has been raised to 7 from 5, putting it on par with the 1986 Chernobyl meltdown. Meanwhile, Alcoa (NYSE:AA) shares are down 6.3 percent and easily the biggest loser in the Dow Jones Industrial Average after the aluminum-maker kicked off the earnings-reporting season with EPS numbers that beat Street views, but revenues that fell short of expectations. The economic calendar included a Trade Balance of -$45.8 billion in February, which was in-line with expectations. The primary focus seems to be some pre-earnings jitters, however, and the problems facing areas around Tokyo. The Dow Jones Industrial Average is down 126 points and the NASDAQ lost 31. The CBOE Volatility index (.VIX) gained .86 to 17.45. Trading in the options market is busy and clearly more defensive than in recent days. 9.3 million calls and 8.1 million puts traded so far.

Bullish Flow

BofA (NYSE:BAC) April 14 calls are the most actively traded equity options contract Tuesday morning. The top two trades are 10,000-contract blocks at 6 cents each. Shares are down 12 cent to $13.37 and these calls are now 4.5 percent out-of-the-money. 36,000 have traded and open interest is 364,528, which is the fourth largest position in Bank of America. Delta is .17, as the contact has three and half days of life remaining. Some investors are likely closing out positions. Others might be taking new positions and hoping for a post-earnings rally in shares. BofA is due to release earnings the morning of options expiration Friday.

Bearish Flow

Steve Smith notes for Whatstrading.com today that: Target shares are up 45c to $49.70 and see notable volume in the October $48 puts as two large blocks trade at the offer of $3 and $3.05. A total of 10,000 contracts now traded. Shares of TGT have been one of the worst performers among big box general merchandise retailers declining some 17% for the year to date. While open interest is sufficient to cover, sentiment data suggest opening put purchases in TGT today. Some might be tied to stock, as two blocks totaling 93K shares (53K and 40K) also traded this morning. The company offered an investor update today at a ISE Group Retail Summit. Expects EPS of $8 and revenues of $100 bln by 2016/2017.

Implied volatility Mover

Two days of put buying and then a tumble for Longtop Financial (NYSE:LFT). Shares are down $4.50 to $26.55 and falling to session lows, 52-week lows, in heavy trading. Options is 6X the average daily, with another 14,000 puts and 3,200 calls traded. Looks like some investors are bracing for additional downside in May 20, 22.5 and 25 puts, which are the most actives. April 25 and 30 puts are busy as well. Implied volatility jumped 21 percent to 97. No news on the stock, but it seems that some investors had been anticipating today’s volatility in the stock over the past two days.