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Daily Wrap Options Market Commentary for January 10, 2014options Xpress - Friday, January 10th, 2014

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Market Update

Stock market averages slipped on jobs data through midday Friday, but finished little changed Friday. The monthly report from the Labor Department showed the US economy adding a mere 74,000 jobs for December. Economists were expecting to see nearly 200,000. However, November numbers were revised up to 241,000 from 203,000 and the rate of unemployed ticked down to 6.7 percent from 7 percent. Nevertheless, bonds rallied on the poor headline number and the yield on the benchmark ten-year Treasury eased back to 2.86 percent. The dollar was weaker and gold rose $17 to $1246.5. Crude oil added 99 cents to $92.65. Earnings results painted a murky picture. Alcoa (AA) lost 5.4 percent in the wake of its results and Sears Holdings (SHLD) fell on an earnings warning. However, Gap Stores (GPS) is up on same store sales results and Abercrombie (ANF) rallied on better-than-expected guidance. Attention next turns to the barrage of earnings that will begin flood the market over the next few weeks. A report on Retail Sales Tuesday morning might garner some attention as well. Today, the equity finished in decidedly mixed fashion. The Dow lost 8 points, but the NASDAQ added 18.5.

Today's Bullish Trading

A large trade in Juniper Networks was creating a bit of a buzz in the options market Friday afternoon. The stock was up 70 cents, or 3.1 percent, to $23.55 in active trading of 16.5 million shares. On the options front, one player bought a block of 50,000 April 11 calls on the networking company for $11.85 per contract. The activity is opening because volume easily exceeds open interest in the contract. It is somewhat unusual since the options are already deep in-the-money and due to the size of the massive cash outlay necessary to open the position. It’s not clear what motivated the premium purchase or the relative strength in the stock, as there were no immediate headlines on the ticker. The company is slated to report earnings on January 23rd.

Bullish trading was also seen in Fortinet (FTNT), Goodyear Tire (GT), and Family Dollar (FDO).

Today's Bearish Trading

A hefty spread trades in Sprint (S) as well. The stock was trading 4 cents higher to $9.46 on the day and one investor was apparently selling 46,000 May 8 calls on Sprint for $1.94 and buying 41,000 May 6 puts for 11 cents. On the surface, the massive May 6 – 8 risk-reversal appears to be a bearish position in Sprint. However, the options were also tied to 4.6 million shares for $9.44. Therefore, the big trade appears to be a position similar to a buy-write or covered call using in-the-money call options. The investor is also buying deep out-of-the-money puts, which would offer some downside protection if the stock tanks over the next few months.

Bearish trading was seen in Arm Holdings (ARMH), CH Robinson (CHRW), and Medicines Co (MDCO).

Index Recap

The NASDAQ 100 Index (.NDX) saw more options volume on Friday. The index tracks that top 100 stocks that trade on the NASDAQ Stock Market (excluding financial names) and jumped 12.5 points to 3,565.10 Friday. Options volume on the index was 2X the daily average, with about 32,000 calls and 49,000 puts traded on NDX today. The top trades were part of a spread, with an investor apparently buying 15,000 Weekly (1/31) 3325 puts for $4.89 and selling 3300 Weekly (1/31) 3300 puts for $4.19. The position appears opening and, if so, seems to be expressing the view that NASDAQ stocks could fall sharply through the end of this month. A portfolio manager possibly opened the spread as part of short-term hedging strategy.

Analyzing the ETF Market

iShares Long-term Treasury Bond Fund (TLT) saw brisk trading on the heels of today’s jobs data. TLT holds bonds that mature in 10 or more years and will move higher when Treasuries strengthen but yields fall. Today, for instance, the ETF was up $1.24, or 1.2 percent, to $104.42 in active trading of 11.5 million shares after the weak payroll report sent Treasuries higher and the yield on the benchmark ten-year Treasury down to 2.86 percent. In options action, 53,000 calls and 56,000 puts traded on the bond ETF, which is 2.5X the daily average. Jan 103 puts were the most actives in the product. 11,820 contracts traded and some investors were possibly liquidating positions. The contract is now $1.42 out-of-the-money and expiring at the end of next week.

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