Bull Stampede

Market Update from OptionsXpress

Stock market averages rallied at the open, extended the gains through midday, and then closed near session highs Thursday. The focus was again on politics and investors are seeming to grow more optimistic that lawmakers will soon agree to raise the debt ceiling rather than run the risk of a messy debt default. While parts of the government remained shut down for a 10th day, President Obama has agreed to meet with House Republicans to begin negotiations on budget issues. Reports that Republicans are looking to raise the debt ceiling for up to six weeks also helped set the table for a steady open on Wall Street. Reports later that a bill could be voted on as early as tomorrow seemed to bolster sentiment in afternoon trading as well. On the economic front, data out this morning showed Jobless Claims increasing by 66K to 374K, which was much worse than the 318K that was expected. The data had minimal market impact. Meanwhile, Facebook (FB) was up 4.9% on reports the company is working on an interface for Apple mobile devices and Gilead Sciences (GILD) jumped 6.5% on news it is seeking approval for a cancer drug. Treasury bonds fell lower, however, and the yield on the ten-year Treasury is now 2.67 percent. Crude oil added $1.32 to $102.90 and gold lost $19.5 to $1287.50.  On Wall Street, the Dow was up 230 points midday and closed at session highs – up 323 points. The NASDAQ soared 83 points.

Today’s Bullish Trading

Chipmaker Advanced Micro Devices (AMD) was up 14 cents to $3.79 and options volume on the stock was 2.5X the daily average Thursday. About 54,000 calls and 2,000 puts traded on the ticker. The biggest trade was a spread, in which the investor was apparently buying 20,000 November 4 calls on the stock for 21 cents per contract and selling 20,000 November 4.5 calls at 9 cents each. The Nov 4 – 4.5 call spread, for 12 cents, appears to be a new position (as volume exceeds open interest in both contracts) and seems to be expressing a bullish view on AMD heading into an October 17 earnings report.

 Bullish trading was also seen in Gannett (GCI), McDermott (MDR), and Swift (SWFT).

Today’s Bearish Trading

A hefty spread trades in Energy XXI Limited (EXXI) Thursday as well. Shares of the Bermuda-based oil and gas services company were up 54 cents to $30.56 and a March 22 – 28 put spread trades on EXXI for $1.70, 10000X. In this strategy, the investor was apparently buying 10,000 Mar 28-strike puts for $2.55 and selling 10,000 Mar 22 puts at 85 cents. The spread traded 20000X on the day and is possibly protective put or hedging activity in EXXI heading into earnings, due out around November 7. The stock is up 15 percent since the company last released results.

Bearish trading was also seen in Gap Stores (GPS), URS, and YRC Worldwide (YRCW).

Index Recap

CBOE Volatility Index (.VIX) fell sharply on a day of falling implied volatility across the options market Thursday. VIX, which tracks the expected or implied volatility priced into S&P 500 Index (SPX) options, dropped 3.12 points, or 15.9%, to 16.48 after the S&P 500 surged 36.16 points to 1,692.56. Meanwhile, implied volatility  in the options on the Dow Jones Industrial Index, as measured by VXD, declined by 2.63 points to 15.76 and NASDAQ 100 Volatility (VXN) was off 3.23 points to 18.45. VXEEM (emerging markets), OVX (US Oil Fund), and RVX (small caps) fell sharply today as well.

Analyzing the ETF Market

iShares Emerging Markets Fund (EEM) rallied 98 cents, or 2.4 percent, to $42.64 and December 41 calls on the ETF were today’s most actively traded options contract. A 50,000-contract block traded this morning for $2.39 per contract and a buyer initiated the trade, according to a source on the exchange floor. Later, another 50,000 traded for $2.47 per contract. At the end of the day, 219,200 Dec 41 calls traded on EEM. Open interest at that strike is more than 245,000 and therefore an investor is possibly covering or closing a position. Looking at trade history, it appears that most of the open interest is from early-July when shares were around $37 and 225,000 of the same calls were apparently being sold-to-open, maybe as part of a covered call or buy-write strategy against shares. Now, with those options $1.64 in-the-money, the investor is probably buying-to-close, rather than run the risk of suffering further losses on the short call position.