Wednesday Options Recap

Sentiment

Action is mixed heading into the closing bell and the cautious underlying tone continues. Stock market averages had forged modest gains into midday with the help from economic data. A report showed Industrial Production up 1.1% in April and .6% better than expected. Housing starts improved to 717K in April, from 699K in March and better than the 680K that was expected. However, another round of selling surfaced late in the day after the FOMC released minutes from the latest meeting on monetary policy and the text left the question about further easing still unanswered. Volatility in the commodities market is also a catalyst for the late-day selling pressure. Crude oil fell for a fourth consecutive day and lost $1.25 to $97.23. Gold gave up $17 to $1,540 and entered bear market territory after declining more than 20% from record highs. Trading was orderly throughout most of eurozone equity markets, but still Spain’s IBEX lost 1.3% amid concerns about the political impasse in Greece and the outlook fore urozone periphery countries. Trading is active on Wall Street and the Dow Jones Industrial Average has seesawed in and out of positive territory in the final hour. The Dow is now down 16 points and the Nasdaq lost 18 amid persistent weakness in Apple (AAPL), which is on a four-day 5% losing skid and probing session lows. CBOE Volatility Index (.VIX) is up .36 to 22.33 amid cautious trading in the options market. 8.9 million calls and 10.4 million puts traded across the exchanges thus far.

Bullish Flow

Citi (C) loses 59 cents to $27.20 in active trading of 39 million shares and has now suffered a four-day 11.5% losing skid. Citi shares are now nearly 30% below their late-March multi-month highs. The options order flow doesn't reflect the bearish underlying tone, however, as 153,000 calls and 73,000 puts traded on the bank today. The top trades are call purchases, after an investor bought 35,000 Citi Sep 33 calls for 94 cents and 32,500 Nov 34 calls for $1.18. 1.85 million shares were also sold at $27.85 and the call buying is possibly part of a stock replacement strategy in Citi today. That is, the investor was liquidating stock to free up capital, but buying calls to maintain bullish exposure on the bank.

A seemingly bold trade in SPDR Gold Trust (GLD), which is down 27 cents to $149.27 following another day of losses in the yellow metal. Gold was recently off $15 to $1542 an ounce. There’s been no flight-to-safety bid helping the metal during the latest market turmoil, as gold has given up 7.3% month-to-date. One player in the options market seems to be anticipating a rebound, however, as 12,000 Sep 154 puts were apparently sold on GLD at $9.13 to buy a Sep 161 – 166 call spread at $1.06, 12,000X. The three-way spread, at a $8.07 net credit ($9.7 million), looks opening and seems to express confidence that GLD will recapture $154 (~3%) through the September expiration.

Bearish Flow

Dell (DELL) is off a nickel to $15.29 and a Jun 14 - 15 put spread trades on the computer-maker for 27 cents, 10,000X on ISE. A customer bought the spread, to open, according to ISEE. It doesn't look tied to stock and comes ahead of a Mar 22 earnings release. RBC yesterday said yesterday that they're cautious heading into the report and said softer PC data, weakness in the public sector and the commodity pricing environment could pose a risk to estimates. Stifel is out with similar cautious comments today. The spread is possibly designed to hedge the event risk.

Implied Volatility Mover

Darden Restaurants (DRI) sees a midday spike and is up $4.11 to $55.62 on heavy turnover of 4 million shares. Options volume is 25X the daily average, being driven by May, June and July 55 call buyers. 17,000 calls and 2,500 puts traded on the stock and 30-day ATM vols surged 78% to 43.5. No news on the stock, but something is certainly out there. There’s maybe chatter or some other pending news. (Note: the stock has since given back much of the gains late-Wednesday and there are still no headlines on the stock.)

Unusual Volume Movers

Bullish flow detected in Computer Sciences (CSC), with 3,874 calls trading, or 4x the recent average daily call volume in the name.

Bullish flow detected in Stillwater Mining (SWC), with 5,070 calls trading, or 3x the recent average daily call volume in the name.

Bearish activity detected in Ariad Pharmaceuticals (ARIA), with 5,719 puts trading, or 5x the recent average daily put volume in the name.

High options volume is being seen in Morgan Stanley (MS), iShares Emerging Markets Fund (EEM), and SPDR Gold Trust (GLD).