Tuesday Options Recap

Sentiment

Trading was slow Tuesday morning, but market averages are posting gains through midday-Tuesday. Some of the focus before the opening bell on Wall Street was on another round of disappointing Housing Starts data. Builders broke ground at an annual rate of 571,000 homes in August, which was down from 601,000 the previous month and also below economist estimates of 590,000. The tone of trading was cautious early on the poor data and as investors wait for the conclusion of the Federal Reserve’s latest meeting on monetary policy. An announcement will be made tomorrow afternoon. However, gains across Eurozone equity markets and a modest rebound in the euro seemed to help lift sentiment through mid-morning and the Dow Jones Industrial Average is now up 116 points Tuesday afternoon. The tech-heavy NASDAQ added 16. CBOE Volatility Index (.VIX) is down .89 to 31.84. Overall options volume is slow, with 5.1 million calls and 4.7 million puts traded so far. (Recap sent early today due to travel).

Bullish Flow

AMR adds 15 cents to $3.50 after the International Air Transport Assoc raised its 2012 airline industry profit forecast to $6.9 billion from $4 billion. Options volume in the airliner is running 4X the daily average, with 31,000 calls and 10,000 puts traded in AMR so far. Oct 3 calls are the most actives. 23,830 traded (83 percent Ask) at a VWAP of 62 cents per contract. Open interest is only 678. Oct 3.5 and 4 calls are seeing interest as well. On the put side of the options chain, the flow includes a block of 3935 Jan13 3 puts at 86 cents this morning on ISE, which is a closing put seller, according to ISEE data. 8,028 now traded against 70,306 in open interest, which is the largest position in the name.

Bearish Flow

Bed, Bath and Beyond (BBBY) adds 14 cents to $60 and a 4500-contract block of Oct 65 calls trades on the retailer at 77 cents on ISE when the market was 75 to 79 cents. Sentiment data indicate a customer sold-to-open the position. Implied volatility in BBBY is up 2 percent to 38 ahead of earnings, due tomorrow after market. A shareholder might be writing calls against stock ahead of the profit report.

Implied volatility Mover

Implied volatility in Molycorp (MCP) is rallying, as shares fall on a JP Morgan downgrade. The firm cut its rating on the stock to Neutral and lowered its price target to $66 from $105 per share. JP Morgan cites lower prices for rare earth materials after a surge in the Spring. MCP is getting hammered for a $10.17 per share loss and now trades at six-month lows of $42.84. Options volume is 36,000 calls and 22,000 puts. Most of the action has been in smaller sizes. The top trade is a 500-lot of Weekly (9/23) $50 calls at the 55-cent asking price. 3,530 traded. Weekly 47.5 calls have also traded 3,530X. Oct 50, 55, and 57.5 calls are the next most actives. Meanwhile, implied volatility in MCP has rallied 36 percent to 86, but remains well below the extremes of 125 seen on 8/8.