Thursday Options Recap

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Includes: HPQ, P, XLF
by: Frederic Ruffy

Sentiment

Stocks failed to build on Wednesday's afternoon reversal and major averages are in the red late-Wednesday. The economic news didn't help. The Labor Department reported this morning that jobless claims decreased by 2,000 to 370,000 last week. Economists were expecting a 7,000 drop. Separate data showed Durable Goods up .2 percent in April and .1 percent less than expected. The Dow Jones Industrial Average was steady early despite the poor numbers and was helped higher by a solid post-earnings rally in H-P. However, another barrage of selling surfaced mid-morning on headlines about China's biggest banks not being able to meet loan targets. The Dow sank on the news and is down 49 points in the final hour. The NASDAQ lost 31.5 and is probing session lows. CBOE Volatility Index (.VIX) is up .58 to 22.91 amid slowing volumes in the options market. 6 million calls and 6.1 million puts traded so far.

Bullish Flow

Pandora (NYSE:P) adds $1.67 to $12 on heavy volume of 10 million shares and is trading at its best levels since a March 6 earnings miss after the Internet radio operator reported a 9-cent per share quarterly loss. Analysts were expecting a loss of 18 cents per share. 20,000 calls and 18,000 puts now traded in Pandora, which is 5.5X the daily average. The top trade seems to express a bullish view for the months ahead, as a Sep 9 - 14 risk-reversal trades for 23 cents, 9477X on NYSE-ARCA. A source on the floor confirms that puts were sold to buy calls. It's an opening play and will create some of the largest open interest positions in Pandora options, second only to the Jun 11 calls. (Originally posted at 11:21).

Bearish Flow

Players in the options market don't seem convinced that the problems plaguing the banking sector will be cured any time soon. SPDR Financials (NYSEARCA:XLF) is off 12 cents to $13.94 and options volume on the ETF is 347,000 puts and 32,000 calls, a ratio of more than ten-to-one. Recent trades include a July 9 - 11 - 13 put fly, bought at 22 cents, 19,500X. A bit earlier, 85,000 Aug 13 puts traded on XLF electronically on CBOE for 51 cents when the market was 50 to 51 cents. A little later, 90,000 more traded at the 52-cent asking price on ISE and ISEE is reporting an opening position traded firm-to-firm. 183,925 Aug 13 puts now traded on the fund. Weekly 14 puts are also actively traded and 30-day ATM vols in XLF climbing 4 percent to 29.

Implied volatility Mover

Hewlett Packard (NYSE:HPQ) is up 5.4 percent to $22.21 and is the chief reason why the Dow is above water Thursday morning after the computer company reports earnings after the closing bell yesterday. One player in the options market seized the strength to buy 15000 Nov 17 puts and sell 15000 Nov 24 - 30 call spreads, collecting 54 cents on the package, and probably closing out the position opened two days ago for 37 cents. HP came under pressure yesterday in the wake of DELL's disappointing results, but is up 1.9 percent since the trade was initiated Tuesday. Consequently, there's an 8-cent profit on the puts and a 9-cent gain on the call spread. The investor might have expected better news this week, however, and is liquidating the position now, even though there's almost 6 months of life remaining in the November contracts. Meanwhile, overall levels of implied volatility in HP options has plummeted 35 percent to 33 now that the earnings event risk has passed.