Thursday Options Recap

Sentiment

The major averages opened lower at the open amid weakness in overseas markets. Asia's markets lost ground after China's central bank unexpectedly raised a key interest rate. It was the first tightening in five months and signals a policy change towards fighting inflation. Shanghai's Composite Index suffered a 1.9 percent drop on the news. Japan's Nikkei fell .5 percent and Hong Kong's Hang Seng lost .7 percent. Equity markets were modestly lower across Europe as well.

In the US, trading remained cautious ahead of key monthly jobs data due out Friday morning. Earlier in the day, the Labor Department reported that weekly jobless claims rose 1,000 to 434,000 in the week ended January 2, which was a bit better than the 6,000 increase economists were expecting.

Stock index futures showed a modest negative reaction to the numbers, which come the day before key monthly jobs numbers are released. Economists expect Friday's numbers to show the economy losing 35,000 jobs and the rate of unemployed increasing to 10.2 percent from 10 percent.

So, trading was somewhat cautious early, but in a now familiar pattern, market action has turned mixed. While the Dow Jones Industrial Average is up 26 points, the NASDAQ is off 2.8 points. With forty minutes left to trade, the CBOE Volatility Index (.VIX) is off .23 to 18.93. Trading in the options market is active, with about 5.6 million puts and 8.4 million calls traded so far (a ratio of .67, compared to a 22-day average of .64.)

Bullish Flow

GE (GE) added 90 cents to $16.35 and was easily the best percentage gainer in the Dow Jones Industrial Average midday Thursday. The reason for the strength isn't entirely clear, but the company did just announce that one of its units signed an agreement to deliver 50 new AC44i locomotives for freight transport. In the options market, sentiment seems somewhat bullish as well, with 152K calls and 49K puts traded. No big prints today. The top trade is 2,100 Mar 17.5 calls on the bid at 33 cents and appears to be a part of a buy-write. Indeed, there have been several "derivately priced" equity blocks today and four blocks of 1 million GE shares or more changing hands today.

OSI Systems (OSIS), which has been rallying since Jan 24 as a play on increased airport security, is up another 27 cents to $28.72. The company makes body scanners and other products to inspect baggage, cargo, vehicles, etc. In the options market, recent trades include a Feb 25 - 30 risk-reversal, 1000X on PHLX. Looks like the strategist paid 85 cents to buy calls, sell puts, and open a new position.

Bearish Flow

iShares Emerging Markets Fund (EEM) slipped 32 cents to $42.79, weighed down by shares in China after China's Central Bank unexpectedly raised rates and sent China's Shanghai down 1.9 percent. China accounts for 11.1 percent of the EEM. In the options market, one player appears to be bracing for additional weakness through next Friday. They paid 11 cents for the Jan 40 - 41 - 42 put butterfly spread, 10000X on AMEX, creating a bearish risk graph with a max profit if EEM settles at $41 (-4.2%) by next week's expiration.

Implied Volatility Movers

Big Print in Ford Motor (F) after an investor pays 58 cents for Jan11 17.5 calls, 50000X on CBOE. Ford is up 4 cents to $11.41 and extending a 14.1 percent year-to-date advance that was fueled, in part, by Tuesday's better-than-expected December sales numbers (+32.8% vs. 13% consensus). Implied volatility in Ford options is revving up as well, up 5 percent to the mid-40s so far in 2010.

Unusual Volume Movers

Select Sector Financials (XLF) is seeing 4X average daily trading volume, with 800,000 contracts traded and call volume representing 70 percent of today's activity.

BofA (BAC) is seeing 2X average trading volume, with 752,000 contracts traded and calls representing 72 percent of today's trading activity.

Google (GOOG) is seeing 3X normal trading volume. 139,000 contracts have traded, with call options representing about 58 percent of today's volume.

Unusual volume (two times or more than normal average volume) is also being seen in Regions Financial (RF), Dendreon (DNDN), Delta Airlines (DAL).