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Sentiment

Stock market averages fell Thursday morning after another big quake north of Tokyo, but the knee-jerk reaction was short-lived and trading is orderly heading into the final hour. Economic data was in focus before the opening bell after the Labor Department reported that weekly jobless claims declined by 10,000 to 382,000 in the period ended April 2. Economists had predicted a decline of 6,000. Meanwhile, Bed, Beth and Beyond (NASDAQ: BBBY) helped the Nasdaq 100 in early action after the retailer reported better-than-expected earnings late-Wednesday. Costco (NASDAQ: COST) was the second best gainer in the Nasdaq 100 after the reporting strong March same store sales numbers. JC Penney (NYSE: JCP), Limited Brands (NYSE: LTD) and Macy’s (NYSE: M) were among the other retail winners. However, the Japan quake triggered tsunami warnings and the Dow Jones Industrial Average traded down more than 100 points from session highs. The situation had stabilized by midday and the Dow is now down 45 points. The tech-heavy NASDAQ lost 6 points. The CBOE Volatility Index (CBOE: VIX) rallied to 17.77 and is now up .34 to 17.24. Trading in the options market is not very active, with 6.7 million calls and 5.8 million puts traded.

Bullish Flow

Citigroup (NYSE: C) April 4.5 Calls are the most actively traded options contract for a second day. 141,829 traded yesterday and open interest increased by 5380 contracts to 757,265. Today, shares have added 7 cents to $4.66 and 87,340 more have changed hands. 36% traded on the bid and 59% at the ask, as there seems to be a mix of opening and closing activity happening in the contract. The April 4.5 call is now 16 cents in-the-money and has fewer than seven trading days of life remaining. Citi will report earnings on April 18, after the April expiration. A 10-for-1 reverse stock split happens on May 6. There’s been a lot of interest in Citigroup options ahead of these events. Today, for example, the five most actively traded equity options are the Citi April 4.5 calls, June 4, puts, May 5 calls, May 4.5 calls and April 4.5 puts.

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Bearish Flow

Wal-Mart (NYSE: WMT) loses 7 cents to $52.91 and is one of 29 Dow stocks heading lower Thursday morning. Meanwhile, in options action, a noteworthy trade is a WMT May 52.5 – 55 Strangle, bought at $1.30, 8000 times. The position was tied to 192,000 shares at $53.05 and appears to be an opening play — a bet that shares of the world’s largest retailer will see increasing volatility over the next 43 days. WMT, which stopped reporting monthly same store sales numbers, fell 3.1% on Feb. 22 after earnings were reported and fell another 4% in the weeks that followed. However, the stock is up 3.1% since March 17.

Yahoo (NASDAQ: YHOO) loses 9 cents to $16.96 and one investor sells 10,000 YHOO April 17 Calls to buy 20,000 YHOO April 16 Puts, collecting 14 cents on the bearish (1X2) risk-reversal. The position was tied to 700.000 shares at $16.94. It comes after a 5.9% gain in shares since March 17 and possibly closes a bullish position. Or, it might be a bearish play ahead of next week’s expiration. No news on the stock today. Yahoo is due to report results after market on April 19, which is the Tuesday after the April contracts come off the board.

Implied Volatility Mover

Rare Element Resources (AMEX: REE) is leading the sector to higher ground Thursday on reports the U.S. might respond to China’s recently announced plans to stockpile rare earth materials by initiating a stockpiling of its own. REE is up 16.2% to $15.27 and heading to session highs. Options action is brisk, with 23,000 calls and 11,000 puts traded in Rare Element so far. Most of the action has been smaller lots. The top trade is a REE April 12.5 – 14 Put Spread, apparently bought at 60 cents, 500 times. April 14 and 15 calls are the most actives, with 3520 and 4800 traded, respectively. Investors seem to be taking positions in the front-month April options and anticipating additional action in REE tomorrow and the rest of next week before expiration. Implied volatility is up 7.5% to 80. Avalon Rare Metals (AMEX: AVL) and Molycorp (NYSE: MCP) are seeing relative strength as well. The Market Vectors Rare Earth ETF (NYSE: REMX) is up 2.1%.

Options Flow

Bullish flow detected in Charles Schwab (NYSE: SCHW), with 4228 calls trading, or three times its recent average daily call volume.

Bearish activity detected in Simon Property Group (NYSE: SPG), with 8296 puts trading, or seven times its recent average daily put volume.

Bullish flow detected in Hertz Global (NYSE: HTZ), with 6390 calls trading, or eight times its recent average daily call volume.

Increasing volume is also being seen in National Semi (NYSE: NSM), TiVo (NASDAQ: TIVO), and AMR (NYSE: AMR).
Frederic Ruffy is the Senior Options Strategist at Whatstrading.com, a site dedicated to helping traders make sense of the complex and fragmented nature of listed options trading.