Midday Update for February 8, 2011

S&P 500 Index (.SPX) 1,321.03 +1.98
CBOE Volatility Index (.VIX) 16.29 +0.01
DJIA 12,201.40 +39.77
NASDAQ 2,786.25 +2.26

Stock market averages are holding modest gains on another slow news Tuesday. With no economic data of significance until Thursday's weekly jobless claims, the focus is primarily on stock news. McDonald's (MCD) shares are up 2.9 percent and the best gainers in the Dow Jones Industrial Average after the fast food chain reported better-than-expected global sales numbers. Strength in MCD and 20 other Dow stocks has been enough to offset early weakness triggered by news that China raised rates for a second time in six months. However, after hitting a morning low of 12,150 early Tuesday, the Dow has battled back and is trading up 45 points to 12,207. The bullish underlying tone continues. The NASDAQ has added 4.3. The CBOE Volatility Index (.VIX) is steady at 16.28. Options volume is running about the typical levels, with 4.5 million calls and 3.0 puts traded through 12:15pm ET.

Bullish Flow

Microsoft (MSFT) shares lost 2 cents to $28.18 and volume in February 29 calls is approaching 30,000 contracts through midday Tuesday. The Seattle Times is reporting today that Microsoft CEO Steve Ballmer is planning to shake things up at the executive level and promote individuals with strong engineering backgrounds. The article cited two anonymous sources and explained that an announcement could come within a month. It's not clear if today's increased call activity is related to the news. February options expire in 10 days and the February 29 calls are almost 3 percent out-of-the-money. The average price per contract traded so far today is 11 cents.

Bank of New York (BK) calls are active as well. Shares of the money center bank are up 40 cents to $32.24 and options volume is running 3X the average daily, with 12,000 calls and 375 puts traded so far. March 31 calls, which are already $1.24 in-the-money, are the most actives. More than 8,000 traded. February and March 32 calls are busy as well. There's no news on the stock. The company is presenting at an Oppenheimer conference. So, perhaps the increased call activity is related to the presentation.

Bearish Flow

An interesting spread trades in the MSCI EFA Fund (EFA) Tuesday morning. EFA, which is an exchange-traded fund that holds shares of companies from Europe, Asia and the Far East, touched a new 52-week high and is up 36 cents to $61.34. Meanwhile, in options trading, one investor bought 20,000 March 60 puts at $1.06 and sold 40,000 March 57 puts at 47 cents. This 1X2 put ratio spread, for a net debit of 12 cents, looks like a bearish play or short-term hedge, as it makes its best profits if EFA falls to $57 by the March expiration, or 7.1 percent in 38 days.

Whole Foods (WFMI) puts are seeing interest ahead of earnings. Shares touched a new 52-week high and are up 13 cents to $52.96. Meanwhile, 4,611 March 50 puts traded in the retailer through midday. 96 percent of the volume traded at the ask, indicating buyers were dominating the action. February 55 and March 60 calls are seeing interest as well. Players are jockeying for a big move in the stock ahead the profit report, due tomorrow after the closing bell.

Implied Volatility Movers

Red Hat (RHT) calls are busy and implied volatility is moving higher Tuesday. Shares have added 40 cents to $44.51 and options volume through midday includes about 10,000 calls and 350 puts, which is 4X the average daily volume. February 45 calls are the most actives. 3,330 traded. February and March 46 calls are busy as well. Looks like upside call buying in the software maker. Implied volatility is up 9 percent to 35.5.


Unusual Volume

Teva Pharmaceuticals (TEVA) options volume is running 4.5X the average daily, with 77,000 contracts traded and put volume accounting for 68 percent of the volume, according to data from WhatsTrading.com.

Sprint Nextel (S) options volume is 2.5X the average daily, with 76,000 contracts traded and call volume representing for 87 percent of the activity.

Disney (DIS) options volume is running 2.5X the average daily, with 41,000 contracts traded and call volume accounting for 54 percent of the activity.

Increasing options activity is also being seen in Sandridge Energy (SD), Red Hat (RHT), and Alcatel Lucent (ALU).

Posted in Commentary, Futures, Options, Stocks, Watchlist Tagged with: , , , , , , , , , , ,