Midday Options Outlook: Trend Change?

Big Ben spoke this morning into the midday and the markets have held up. He reiterated that the Fed is dedicated to restoring the banking system primarily through helping the private sector to be the driving force. While I still think that the markets will remain choppy, this upside action is not unexpected, we were quite oversold and this move should not be considered more than a bear market bounce. The market is absorbing and reacting to current market and economic releases with the sentiment that the current data is not as bad as feared. The VIX (^VIX) at 45, which is still historically high, is positioned in a range that feels appropriate for the current environment. The challenges of this market are still very present and the short-term rally should be treated as such. See you in the After Hours.

Midday Report

Stocks are holding modest gains, as investors shrug off another round of bleak economic numbers and shift some of the focus to Federal Reserve Chairman Ben Bernanke’s testimony on monetary policy Tuesday. Economic data released before the start of trading showed home prices suffering a historic drop, falling more than 18 percent during the fourth quarter. A separate report released an hour later showed consumer sentiment falling to record lows last month. According to the Commerce Department, their index of consumer confidence fell to 25 from 37 last month. Economists had expected a decline to 35. Attention then turned to Fed Chairman Bernanke who speaks to the Senate Banking Committee today. The head of the Federal Reserve rehashed concerns about the deteriorating economy along with the mounting pressures on financial institutions. The equity market showed little reaction to the talk so far. Instead, after two days of volatile trading, the Dow Jones Industrial Average has been in a narrow 126-point range and is up 65 points midday. Risk perceptions are easing a bit. The CBOE Volatility Index (VIX) is down 3.23 to 49.39 and approximately 2.8 million puts and 3.0 million calls traded across the options exchanges by 11:00 Central Time.

Bullish Flow

Hewlett Packard (HPQ) calls are seeing some action ahead of a presentation at the Goldman Sachs Tech and Internet Conference Thursday. March calls at the $30 strike are the most actives. More than 20,000 have traded midday, compared to open interest of 1,945. With shares down 34 cents to $28.94, it looked like some traders were taking new positions in anticipation of a move higher in HP between now and March options expiration (24 days). Yamana Gold (AUY) calls saw increasing activity Tuesday morning. Most of the activity is in the March 8 calls, with almost 12,000 traded by midday. The stock hit a high of $9 and is down 42 cents to $8.60. Some of the activity in those in-the-money calls might be closing trades, as existing open interest is more than 15,000 contracts. Nevertheless, it appeared that buyers were active, as a lot of the early activity was hitting ask-side for $1.35 and $1.40. Gold is down $28.70 to $966.30 an ounce.

Bearish Order Flow

Bearish trading continues in US Steel (X). Shares of the steelmaker are down 85 cents to $20.68 and falling below November lows. The stock is down $10 since February 13. In the options market, puts have been active in recent days and the trend continues Tuesday. Another 23,000 traded midday Tuesday. March puts with strike prices ranging from 22.5 to 17.5 are among the most actives. Praxair (PX) puts are actively traded for a second day. Shares are down 65 cents to $58.88 and more than 5,000 March 60 and 55 puts traded. Similar activity was seen yesterday and open interest in PX puts increased by 44.3 percent to 15,100 contracts. Implied volatility is up to 62 from about 48 Friday, suggesting that options market is pricing in the possibility for heightened volatility in shares of the Connecticut-based basic material company.

Unusual Volume (2x or greater average daily volume)

Rambus (RMBS) options volume is running four times the usual. 52,000 contracts traded and call volume accounts for 79 percent of the activity. Options activity in Schlumberger (SLB) rose to twice the usual, with 47,000 contracts traded and call volume representing 81 percent of the action. Foster Wheeler (FWLT) options activity rose to twice the usual. 19,000 contracts traded and call volume responsible for 63 percent of the day’s action. Increasing volume was also seen in Gold Fields (GFI), Southwest Energy (SWN), and Onyx Pharmaceuticals (ONXX).

Implied Volatility Movers

BofA (BAC) is seeing quiet trading for a change. Shares are up 19 cents to $4.10 and 77,000 contracts have traded, or about 40 percent the normal volume for midday trading. After reaching record highs near 260 Friday, implied volatility in BAC is back down below 200. Implied volatility is also lower in Citi (C), Home Depot (HD), and Target (TGT). Meanwhile, implied volatility remains elevated in CIT Group (CIT), General Electric (GE), and LDK Solar (LDK).

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