Mid Day Options Market Commentary for October 18, 2012options Xpress - Thursday, October 18th, 2012
Google released early and the market hit the stock hard into the Midday. As I write this Corner, GOOG is down an astonishing $68 or ~9% and is halted. Last night the estimated move into the earnings was ~$50, so you can see the miss on revenues and the early release only ramped up the reaction. This has put some more pressure on Tech, QQQ, and this will further hamper the upside in this offensive sector at this stage. I am watching some Retail names, XRT, this has been a sector that has bounced nicely this week and with the domestic data like manufacturing and housing coming in better, could be a nice flag to a stronger consumer. See you After Hours.
Stock market averages are attempting to hold gains following a round of mixed economic news Thursday. According to the Labor Department, weekly jobless claims increased to 388K in the period ended 10/13, from 342K the week before and well above expectations of 360K. However, a separate report released later showed the Philadelphia Fed Survey of manufacturing activity improving to 5.7 this month, from -1.9 and better than the -.1 that was expected. Finally, List of Leading economic indicators was up .6 percent in September and .4 percent better than expected. Trading was sluggish across most Eurozone equity markets and the euro slipped back to 1.31 on the buck. Crude oil is off 51 cents to $92.08 per barrel and gold lost $5.7 to $1747.3. However, the Dow Jones Industrial Average has erased its morning loss and is up 30 points. The NASDAQ is down 2.5 points. CBOE Volatility Index (.VIX) is off.37 to 14.70. Trading is active heading into expiration Friday. 4.5 million calls and 3.5 million puts traded across the exchanges through 12:00pm ET.
This Morning's Bullish Trading
Wells Fargo (WFC) is up 18 cents to $34.65 and options volume on the bank is noteworthy, as about 52,000 calls and 10,000 puts traded in the name – a ratio of more than five-to-one. April 40 calls, which are 15.4 percent out-of-the-money and expiring in 183 days, are the most actives. 26,200 traded. January 35 and November 36 calls are among the most actives in WFC as well. Shares fell 2.5 percent Friday after the bank reported earnings and have seen relatively uneventful trading so far this week. Some players in the options market are possibly taking positions in upside calls on WFC on the view that, now the earnings are out, the stock could resume its winning ways in the weeks/months ahead. The stock is already up 25.7 percent year-to-date.
iShares DJ UH Home Construction Fund (ITB) is up 38 cents to $21.01, new 52-week highs, the day after data showed surprise jumps in both Housing Starts and Building Permits. A report on Existing Home Sales is due tomorrow. One player in the options market might be expecting another good report, as a 3950-contract block of Oct 21 calls traded on ITB today for a dime. 4,300 now traded. If bought for a dime per contract, the breakeven of a $21 call option at expiration (excluding transaction costs) is $21.10. The October contract expires after tomorrow. If shares hold at $21 or less, the option will expire worthless.
This Morning's Bearish Trading
The largest options trades so far today are in Lamar Advertising (LAMR) after a hefty three-way spread was initiated on the Baton Rouge, LA ad agency. Shares are up 30 cents to $39.47 and the investor bought 24,492 October 32 calls on the stock for $7, sold 24,492 January 35 calls at $5, and bought 12,246 January 28 puts for 20 cents. Oct 32 calls have 24,582 in open interest, which is the largest block of OI in LAMR. Today's trader might be buying back to close the position before the contract expires tomorrow. Looking at the trade history of the contract suggests that some were sold-to-open along with the purchase of Oct 29 puts on LAMR – which have the second largest open interest in the name. Now, the investor might be closing the October combo (the 29 puts are more than $10 out-of-the-money and set to expire worthless), while opening a new bearish risk-reversal (1X2) in the Jan 28 puts and 35 calls. An investor with a position in shares might have initiated the trade to help hedge or "collar" a position in LAMR.
Smithfield Foods (SFD) adds 7 cents to $21 and options volume on the meat producer is 7.5X the daily average. 5,140 puts and 350 calls traded on the stock. The flow includes 2,200 Jan 15 puts for 20 cents per contract when the market was 10 to 20 cents. Open interest in the contract is 5,557 contracts and so today's flow is possibly closing activity. Nevertheless, today's activity might reflect concerns about a substantial drop in the stock through early-2013, as $15 puts on SFD are $6, or 28.6 percent, out-of-the-money.
Green Mountain Coffee Roasters (GMCR) options volume is running 2.5X the (22-day) average, with 92,000 contracts traded and call volume accounting for 92 percent of the volume.
EBAY options volume is 2.5X, the average daily, with 81,000 contracts traded and call volume representing for 75 percent of the activity.
Encana (ECA) options volume is running 12.5X the average daily, with 77,000 contracts traded and call volume accounting for 98 percent of the activity.
Increasing options activity is also being seen in Lamar Advertising (LAMR), Abbot Labs (ABT) and Sandisk (SNDK).
Implied Volatility Mover
Implied volatility in the options on Dollar Thrifty (DTG) moved higher after the FTC said it needs more time to review the company's proposed merger with Hertz (HTZ). The stock is down $1.26 to $85.55 and options volume on DTG is running 5.5X the daily average. 6,130 puts and 810 calls traded. Some investors might be concerned that the deal is in jeopardy. Implied volatility in DTG options, which was only 4 percent yesterday due to expectations for a merger, is up to 14 percent.
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