Friday Options Recap

Sentiment

Stock market averages are sporting modest losses and showing some resilience midday Friday. The table was set for a morning sell-off on Wall Street after the Labor Department reported that the U.S. economy added just 54,000 jobs last month. Although ADP’s report Wednesday, which showed a modest 38,000 increase in May private sector payrolls, was a harbinger for a disastrous jobs report, economists were looking for today’s headline number to show an increase of about 170,000. Those estimates proved far too optimistic, however, and April numbers were also revised down. The rate of unemployed ticked up .1% to 9.1%. Economists were looking for the unemployment rate to hold steady at 9%. On a brighter note, the latest ISM Services Index improved to 54.6 in May, from 52.8 the month before and better than the 53.3 that economists had predicted. The Dow Jones Industrial Average had found some support heading into the ISM and continued to climb off session lows once the news hit the wires. With about two hours left to trade, the industrial average is down 67 points and 77 points off session lows. The tech-heavy Nasdaq is down 25.5. CBOE Volatility Index (.VIX) is off .62 to 17.47 now that this week’s economic news is out. However, trading in the options market remains defensive, with 5.3 million calls and 5.8 million puts traded across the exchanges thus far.

Bullish Flow

Dryships (DRYS) adds 34 cents to $4.17 and options are busy today after Goldman Sachs upgraded the stock to Buy from Neutral. 32,000 calls and 8,260 puts traded on the dry bulk shipper. The top trades are part of a three-way spread after 5,000 Sep 3.5 puts traded at 17 cents while the Sep 5 - 6 call spread traded at 12 cents, 5000X. All three legs traded on the ISE, where sentiment data suggest puts were sold to finance the call spread. If so, the strategist is opening a position and probably looking for shares to drift beyond $5 through the September expiration.

Yahoo (YHOO) loses 12 cents to $15.89 and and the Jan 12.5 – 20 risk-reversal trades at 2 cents, 10000X on PHLX. Like yesterday, calls were bought, puts sold (see 6/2 recap). Today’s open interest data indicate that yesterday’s bullish combo was opening. Today’s trade probably adds to it.

Bearish Flow

Medco Health Solutions (MHS) loses $1.34 to $58.25 and an MHS July 60 – 65 – 70 call fly is sold at 75 cents, 24000X. It probably closes out a position opened in mid-March when the same spread traded at $1, 24000X (see 3/16 report). Shares are up 2.7% since that time, but the gain has not been sufficient enough and the spread is being closed out for a 25-cent loss. Moreover, shares tumbled 9% on 5/27 on news CVS (CVS) has won a Regence Blue Cross/Blue Shield Government-wide pharmacy benefits contract. Today’s spread trader is probably throwing in the towel on hopes for a move back toward $65 through the July expiration.

Implied Volatility Mover

EBIX (EBIX), an Atlanta-based business software company, is back under pressure and implied volatility is rallying Friday. Shares are down $1.62 to $17.06 and options volume includes 5,950 puts and 1,190 calls. The top trade is a 168-lot of Sep 15 puts at the 90-cent ask price. 507 traded. June 15 and 16 puts are the most actives. Looks like players are bracing for additional downside and implied volumes in EBIX are up 75% to 77. No news on the ticker today. Shares were slammed in late-March on a negative Seeking Alpha article related to the company’s accounting and financials (see 3/24 color).

Unusual Volume Movers

Bearish activity detected in Adobe Systems (ADBE), with 7802 puts trading, or 6x the recent avg daily put volume in the name.

Bullish flow detected in Eldorado Gold (EGO), with 7943 calls trading, or 4x the recent avg daily call volume in the name.

Bullish flow detected in GT Solar International (SOLR), with 5567 calls trading, or 6x the recent avg daily call volume in the name.

Increasing volume is also being seen in Brocade (BRCD), Lowe’s (LOW), and Harmony Gold (HMY).