Midday Stock Options Update

Market participants are now starting to trade more cautiously, taking a harder look at the news and the news has not been good. Unemployment now stands at 9.8% (as economists expected), but the September nonfarm payrolls reported a larger-than-expected job loss, causing stocks to tank at the opening bell. Market recovered from the day’s lows with some help from the Financials and there appears to be technical support on the S&P 500 near 1020. Part of the morning’s news has focused on Chicago’s run to be the Olympic Host City in 2016. Chicago lost but congrats to Rio who just won. The Brazil Index Fund (EWZ) is up almost 2% on the news. If you check our ETF Center, you can search for an ETF that focuses on a country or region. I am on the road to San Francisco to meet optionsXpress customers at our workshop tomorrow. See you After Hours.

Stocks fell Friday after the latest jobs data from the Labor Department fell short of economist estimates. The report, released one hour before the opening bell on Wall Street, showed the US economy losing 263,000 jobs during the month of September. The loss follows a 201,000 drop the month before and was significantly worse than the 175,000 decline economists had expected. Average hourly earnings rose .1 percent, compared to expectations for a .2 percent increase. The unemployment rate edged up to 9.8 percent from 9.7 percent, which was in-line with economist forecast. The Dow Jones Industrial Average, which had suffered losses in 6 of the past 7 trading sessions, fell again Friday morning, but has since come off session lows midday. The Dow is down 19 points. The CBOE Volatility Index (VIX) is unchanged at 28.27. Trading in the options market remains defensive, with 5.3 million puts and 4.4 million calls traded so far.

Bullish Flow
Pepsico (PEP) calls are busy Friday. Shares are up $2.52 to $60.98 following an analyst upgrade. Options volume is running 6X the average daily, with 21,000 calls and 6,260 puts traded. The biggest trade in Pepsico is a block of 4,650 November 62.5 calls for $1.00 on the AMEX, which looks like an opening buyer. 5,700 now traded by midday. October 60 and 62.5 calls are seeing interest as well.

Xerox (XRX) continues to see heavy trading. Open interest in XRX calls increased by 46,000 contracts following a day of active trading Thursday (compared to 8,000 new interest in XRX puts). Friday, shares are down 19 cents to $7.30 and options volume is running 2X the average daily. Another 31,000 calls and 18,000 puts traded so far. January 2010 calls at the 7.5 line are the most actives.

Bearish Order Flow
A massive put spread surfaced in the iShares Small Cap Fund (IWM) Friday. The exchange-traded fund is down 18 cents to $58.26 and one strategist was focused on the January 2011 puts. They bought 35,000 of the 58s while selling 70,000 45 puts and paid $1.15 for this 1X2 put ratio spread. It’s bearish play, or a hedge, as it makes its best profits if IWM falls to $45 per share or less by January 2011.

Wells Fargo (WFC) puts are heavily traded. Shares are down 21 cents to $26.39 and options activity is running 3X the average daily. An impressive 400,000 puts traded so far, compared to 66,000 calls. Trading is heavy in October 24 - 27 put spreads and January 27.5 - 20 put spreads, and might include some rolling from October to January.

Unusual Volume (2x or greater average daily volume)

Ryland (RYL) options volume is running 3X the usual. 132,000 contracts traded and put volume accounting for 85 percent today’s volume.

Options activity in PNC (PNC) rose to 6X the usual, with 82,000 traded and put volume representing about 83 percent of the activity.

Moody’s (MCO) options activity is running 2X the usual. 61,000 contracts traded and put volume accounting for about 67 percent of the activity.

Increasing volume was also seen in Cemex (CX), Texas Instruments (TXN), and FedEx (FDX).

Implied Volatility Movers
CIT implied volatility is falling after the company unveiled a restructuring plan that seemed to ease some of the short-term anxiety that sent shares sharply lower midweek. CIT is up 18 cents, or 17 percent, to $1.24 and implied volatility in CIT options has fallen back to 233, from about 277 late Thursday.

Meanwhile, implied volatility is also lower in Standard Microsystems (SMSC), Resources Connection (RECN), and On Assignment (ASGN). Implied volatility is higher in Energy Conversion Devices (ENER), PNC, and F5 Networks (FFIV).

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