Daily Stock Options Recap – August 13, 2010

Sentiment

Stocks are trading mixed in slow market action Friday. After a 320-point three-day slide, the Dow Jones Industrial Average opened lower under the weight of another round of uninspiring economic news. The latest data showed retail sales up a less-than-expected .4 percent and the Consumer Price Index [CPI] a stronger-than-anticipated .3 percent. Economists were expecting readings of .5 percent and .2 percent, respectively. After three days of volatile trading in global equity markets, amid disappointing economic news in Asia, Europe and America, Friday’s data did little to assuage investor anxiety levels. However, the morning decline on Wall Street Friday was orderly and trading has since turned mixed. The Dow Jones Industrial Average has traded in a narrow 79-point range and is up 3 points heading into the final hour. The NASDAQ is off 8 points. Meanwhile, the CBOE Volatility index edged up .14 to 25.87. Overall options volume is very light, with about 4.4 million calls and 3.9 million puts traded thus far.

Bullish Flow

HP (HPQ) shares are up 61 cents to $40.75 and trying to stabilize after a rough time during the first half of August. Prior to today, HPQ was down in 7 of 8 trading sessions and had given up 15.6 percent. The stock came under pressure after the close of trading last Friday on reports the company’s CEO was stepping down amid sexual harassment allegations. The WSJ reports today that the DOJ is also stepping up an investigation into the computer maker for alleged bribery in Russia. Yet, after the eight day sell-off, shares are steady and morning trades Friday include a Sep 42 – 45 call spread at 69 cents, 12000X on CBOE. This might add to or close a trade opened yesterday. The biggest trades in HPQ Thursday: 9320 Sep 42 – 45 call spreads at 60 cents (9 cent profit if closing). The 42s traded 23,333X and 45s 13,095X in yesterdays session.

Bearish Flow

MSCI Europe, Far East, and Asia Fund (EFA) is off a nickel to $50.83 and a noteworthy trade in the ETF this morning is a buyer of Sep 45 – 50 put spreads at 98 cents, 4500X. It’s traded multiple times until volume in both contracts has increased to more than 10K. Note, similar bearish spreads surfaced in FXI November puts (see below), reflecting heightened anxiety levels after a relatively turbulent week for global equity markets.

iShares Xinhua China Fund (FXI) edges up two pennies to $40.03 and a noteworthy morning trade is a buyer of 10,000 Nov 33 – 38 put spreads at $1.04 each. This looks like a new position and comes after a rough week for global equity markets, including China. FXI is down 5.2 percent Monday and this spread trader might be initiating the position as a hedge ahead of the historically volatile months of September and October.

Implied Volatility Mover

Apollo Group (APOL) is down $1.72 to $38.60 and falling to session lows amid relative weakness in the education names (CECO, ESI, COCO, DV). The group is under pressure after Bloomberg reported that Education Secretary Duncan said the Dept of Education will increase oversight of federal student aid programs and also as the Dept of Education is releasing data about repayment rates today. The data is expected to have important implications for for-profit education companies like Apollo Group. APOL put options were busy yesterday ahead of the news, with 9,970 Aug 39 puts traded (54 percent ask). Aug 40 and 45 puts were active as well. Today, 9,780 puts and 3,800 calls traded in the name, with a lot of the action again focused on August puts with strike prices ranging from 38 to 45. Implied volatility is up 4 percent to 51, as the market braces for additional details from the Department of Education.