The options market update, posted one hour before the close on Tuesday, January 18, 2011 by Frederic Ruffy.

Bearish activity detected in Virgin Media (NASDAQ: VMED), with 2676 puts trading, or four times its recent average daily put volume.

Bullish flow detected in NPS Pharmaceuticals (NASDAQ: NPSP), with 7234 calls trading, or eight times its recent average daily call volume.

Bearish activity detected in ADTRAN (NASDAQ: ADTN), with 4629 puts trading, or six times its recent average daily put volume.

Increasing volume is also being seen in IBM (NYSE: IBM), Google (NASDAQ: GOOG), and Boston Scientific (NYSE: BSX)

Sentiment

Going into the final hour, stock market averages are holding gains despite in-line economic numbers and disappointing earnings news. Data released early showed the New York Empire Index up to 11.92 in January, from 9.89 the month before. Economists were looking for the gauge of regional manufacturing activity to increase to 12. Later, the NAHB Homebuilder Sentiment Index [HMI] for January showed no change, at 16, which was also in-line with expectations. Meanwhile, Apple Computer (NASDAQ: AAPL) is weighing on the NASDAQ on news Steve Jobs is taking a leave of absence. Citi (NYSE: C) is weighing in the financials after its results missed estimates. However, Boeing (NYSE: BA) is leading the Dow Jones Industrial Average higher. Shares gained 3.3% after the company said the long-awaited 787 Dreamliner is expected in the third quarter. Other cyclical names, like Caterpillar (NYSE: CAT) and Alcoa (NYSE: AA), are also helping the Dow and the industrial average is up 62 points heading into the final hour. The tech-heavy NASDAQ gained 7. CBOE Volatility Index (.VIX) edged up .29 to 15.85. Options action is picking up, with 10.3 million calls and 6.4 million puts traded so far.

Bullish Flow

General Electric (NYSE: GE) GE January 19 Call option volume now exceeds 35,000 contracts. Some investors might be liquidating positions, as shares are down 14 cents to $18.68, the contract is 32 cents out-of-the-money (OTM) with less than four trading days of life remaining, and open interest is more than 170,000. Others might be buying these calls as a cheap way to speculate on GE ahead of its earnings announcement, due on options-expiration Friday, before market. Implied Volatility (IV) in GE is edging up 4.5% to 24.5.

CBOE Volatility Index (.VIX) gains .50 to 15.96, even as the S&P 500 Index (.SPX) adds .7 points in the first two hours of Tuesday’s session. Trading has been choppy this morning and, although the Dow, NASDAQ and S&P 500 are off morning lows and into positive territory, market breadth is mixed. In the S&P 500 index, 276 stocks are higher and 216 are trading lower. Notable weakness is seen in the financials, with Financial Select Sector SPDR (NYSE: XLF) off .14 to 16.58. Consequently, VIX is holding gains and options volume in the volatility index includes 127,000 calls and 58,000 puts. The top trades are call ratio spreads, with one strategist trading a Feb 25 – 32.5 (1X2), 10,000 times, and a May 22.5- 30 (1X2), 10,000 times. They paid 17.5 cents on the four-way, according to a source on the floor, and might be rolling out a bullish position from Feb to May and down 2.5 in strike prices.

Bearish Flow

The three most actively traded option contracts early-Tuesday are Citi options. Shares lost 25 cents to $4.88 after the bank posted a $1.3 billion profit, but overall results fell short of Street expectations. Citi Jan 5 Calls, which currently have the most open interest of any listed options contract and expire at the end of the week, are the most actives. 136,000 traded vs. 2.49 million in open interest. Some investors are likely liquidating positions, as the contract is 12 cents OTM with less than four trading days of life remaining. Citi Feb 5 Calls and Citi Jan12.5 Calls are seeing active trading as well. In total for Citi, 610,000 calls and 121,000 puts traded. Implied volatility is down about 8% to 28.

Implied Volatility Mover

Trading is very brisk in Apple Computer on news Steve Jobs is taking another medical leave of absence and ahead of earnings (after market close). Shares are off $6.71 to $341.77, but $15.77 off session lows of $326. Meanwhile, options volume includes 564,000 calls and 349,000 puts. There does not seem to be an obvious directional bias reflected in the sentiment, but a good chunk of the volume is in the January OTM puts and calls, which expire at the end of the week. Traders are jockeying for position in Jan 350 calls, Jan 340 calls, and Jan 330 puts, the most actives. Implied volatility is up 22% to 33.5 and our models indicate a potential earnings move in excess of 6%. Some of this increased volatility in the front-month options has been driven by the Jobs news, however, as the implied earnings-gap move as of late-Friday was only 3.5%.

Author Frederic Ruffy is a well-known trader, writer, and strategist who has spent years educating investors and creating intelligent, insightful, unbiased market observations that are frequently cited by the Wall Street Journal and other financial publications.