Options Summary: US Earnings Season Begins

The market was on the downside into the close and the sellers came in and really started to pound the financials and banks. There were quite a few spreads that were trading in the market today (Tuesday), with a large strangle trade in Gold Fields (GFI), where the 12.5 calls and the 10 puts where both bought for the debit of $2.50 ($250 per contract and was traded on the PHLX). If you are trading a Strangle, you are anticipating a possibly large move to either the downside, $7.50, or the upside, $15. We saw a similar trade in CKE, Strangle on the ISE, and typically a strangle buyer is strategizing that the stock is going to move on way or the other possibly violently.

With both of these companies having earnings in the next couple of weeks, this could be the driving force behind place these trades. There was also bullishness in the $Dollar (UUP) today as well. After the close Alcoa (AA) announced and missed by .02 but beat on revenues. This starts this earnings cycle on a down beat note. The only economic number that could move the markets is the Crude Inventories for the week of 4/03. See you Midday.

After Hours

General Motors (GM) led the Dow Jones Industrial Average (^DJI) to a 186-point loss Tuesday. GM fell 11.9 percent to $2 per share and was the worst percentage loser in the industrial average after Reuters reported that the automaker was earnestly pursuing bankruptcy plans. Some of the other “cyclical” names like Caterpillar (CAT), DuPont (DD), and Boeing (BA) were also among the Dow’s losers, as investors seem to be taking a more cautious stance heading into the earnings-reporting season, which unofficially kicked off with a report from Alcoa after the closing bell. AA is seeing modest gains in after hours after posting a quarterly loss of 59 cents per share, which was 2 cents worse than analyst estimates. Revenues were slightly better than expected. Alcoa shares fell 12 cents to $7.79 in the regular session and are back up to $8 after hours. Alcoa was among 29 Dow stocks moving lower Tuesday. Only one- Citi (C) -finished the day with gains. Meanwhile, the NASDAQ (^IXIC) lost 45 points. Trading in the options market was light, with approximately 6.1 million calls and 5.8 million puts traded.

Bullish

Lockheed Martin (LMT) finished up 51 cents to $73.79 and sentiment in the options market seemed to be on the bullish side the Defense Department released changes to the 2010 budget Monday. According to Freidman Billings analysts, LMT is likely to be one of the winners coming out of the new budget. Some options traders seem optimistic as well. Total volume in LMT rose to 4X the typical levels, with 12,000 calls and 7,600 puts traded. April 75 and May 85 calls were the day’s most actives. Bullish trading was also seen in Gap Stores (GPS), Teck Cominco (TCK), and Textron (TXT).

Bearish

Costco (COST) saw increasing activity Tuesday. Shares fell $1.35 to $46.39 and 17,000 puts traded on the retailer, compared to 1,470 call options. The put volume represents 3.5 times (353 percent) the expected for Costco. July 45 puts were the most actives. 7,850 traded and, with 84 percent hitting ask-side of the bid-ask spread, it appears that some investors were buying premium on concerns about a possible decline to $45 per Costco share or less through the July expiration. Bearish trading also surfaced in Wynn Resorts (WYNN), Bed, Bath and Beyond (BBBY), and Hasbro (HAS).

Index Trading

The CBOE Volatility Index (^VIX) strayed from its normal pattern Tuesday. The index actually fell .54 to 40.39 despite a 20-point loss in the S&P 500 Index (^GSPC). VIX, which tracks the expected volatility priced into S&P 500 Index options, normally moves higher when stocks take a tumble. That was not the case Tuesday and the odd behavior in the VIX might reflect expectations for quiet trading heading into the extended weekend. Markets are closed for Good Friday this week. Meanwhile, the S&P 500 Index, the CBOE Volatility Index, and the Russell 2000 Small Cap Index (^RUT) had among the most actively traded index options contract. Approximately 465,000 puts and 370,000 calls traded across all the indexes.

ETF Trading

PowerShares Dollar Index Fund (UUP) gained 19 cents to $25.55 as the dollar saw modest gains Tuesday. UUP is an exchange-traded fund designed to track the performance of being long the US Dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. In the options market, trading seemed bullish. Total volume in UUP rose to 2X the average daily levels, with most of the action hitting the September 27 call options. Outside of that, the PowerShares QQQ (QQQQ), the SPDR Trust (SPY), and the Select Sector Financials (XLF) had among the most actively-traded ETF options. Approximately 1.9 million puts and 1.6 million calls traded across all exchange traded funds.

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