Schaeffer's Options Center

Annaly Mortgage (NLY) gapped down and is off 54 cents to $17.34 after the company announced an offering of convertible senior notes. Shares sank on the news and options volume is running 4X the average daily. 26K puts and 15K calls traded so far. While Jan12 7.5 puts are the most actives, some investors appear to be using the weakness to inititate bullish trades in Feb and Mar 18 calls. In fact, prior to the announcement this morning, FBR analysts were out with positive comments on NLY, saying they're buyers at current levels, with the stock trading at 1.05X book and offering a 16.5 percent div. yield.

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VIX has come off session lows of 25.12 and is back to unchanged at 26.51 after the S&P 500 moves more than 10 points off session highs. There does not seem to be one specific catalyst for the turnaround, but note that BofA (BAC), which led the Dow lower with a 3.5 percent loss yesterday, has given up early gains and is down .22 to 14.26. BAC is now falling to its worst levels of the day amid relative weakness in the financials.

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Radian shares are up 20c to $6.60 notable trade in the $2.50 puts with 2011 expiry as 10,000 traded at the 30c asking price. Looks like closing a position opened on 12/22 when shares where around $8.20 and put was trading 25c. The mortgage insurance company is slated to report earnings Feb. 23.

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Cell Therapeutics (CTIC) continues to see heavy trading. After losing 42 cents to 64 cents per share yesterday, shares have added 10 this morning, to 74 cents, ahead of tomorrow's FDA panel related to the company's cancer drug Pixantrone. Meanwhile, CTIC Feb 1 put is the most actively traded options contract early Tuesday, with more than 42K on the tape if the first 15 min. Some investors might be liquidating positions after the plunge in the share price yesterday. The top trade is 10K on the bid at 30 cents. Open interest is 81.7K.

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Dell Computer is seeing relative strrength and calls are active for a second day. Open interest in DELL calls increased by 28000 (compared to -1126 puts) following a day of active trading Friday. Today, another 49K calls and 12K puts traded. Shares are up 23 cents to $13.47 and the top trade is a block of 2212 Feb 13 calls at 70 cents this morning on ISE, which is an opening buyer, according to ISEE data. 11k traded total. Another 16.2K Feb 14 calls also changed hands. The two days of increasing call volumes comes ahead of Dell's Feb 18 earnings release, which is one day before the Feb contracts come off the board.

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Options action is heating up in Electronic Arts (ERTS) ahead of earnings. There seems to be some optimism building. Shares are up 41 cents to $17.67 and call volume is outpacing put activity by almost three-to-one. More than 12K calls and 4790 puts changed hands so far. Feb 19 calls are the most actives and zero percent of today's 7000+ contracts are on the bid (33% Mid / 66% Ask). Implied volatility is up about 7 percent to 52 and a skew between Feb (52.6 percent) and Mar (43 percent) hints at a possible earnings gap move of about $1.06, or 6 percent, when ERTS reports after the closing bell.

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Calpine shares are up 10c to $11.05 and option volume is 3x the daily average being driven by block trade in LEAPs as the $12.50 calls Jan 2011 trade 5,000 contracts were bought for $1.10 and then in then 3,000 contracts (now total of 5,000) of the $12.50 calls with the 2012 expiry traded at $1.90 a contract. Both appear to be opening; checking as to whether this was spread sale.

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CIT Group (CIT) is seeing relative strength and increasing options action (3X avg daily) on news it has hired John Thain as CEO. In his 30-year career, Thain has risen to top executive positions at Merrill, Goldman, and the NYSE. Shares are up $1.02 to $31.79 on the news and July 32 calls are being sold as part of buy-write trades. For example, a block of 3800 contracts near the bid, at $4.85, coincided with a block of 380K CIT shares at $32.05. 12.3K July 32 calls nows traded vs. 23 contracts in open interest.\n
\nSo, in this example, a buy-write or covered call is created by selling 1 July 32 callsat $4.80 against 100 shares at $32.00. Doing so reduces the cost basis of owning shares to $27.20, which becomes the breakeven through the July expiration (or 158 days), excluding commissions. The upside is also limited by the strike price of the call, or $32. If shares are trading for $32 or more at expiration (or possibly before), the calls will be assigned at $32 and the investor will sell the shares at that price. The result is 17.65 percent profit. Importantly, the trade can be closed at any time prior to expiration and, if the calls are not assigned at or before expiration, the strategist can sell calls in a more distant expiration month or close the position by selling the shares at the prevailing market price.

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First Solar shares $3.40 to $110.80 notable transaction looks to be a three way trade in which the initially sold 1,650 March $105/$80 puts spreads traded on CBOE (now 2,300) followed by the purchase of 1,500 of the March $140 calls on PHLX. All could be closing as open interest is sufficient to cover. Shares have declined some 20% in the past month an are at minor support at the $110 level.

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Stocks are indicated modestly higher on a relatively slow news day Monday. Thirty minutes before the opening bell on Wall Street, stock index futures hint at modest early gains for both the Dow Jones Industrial Average and the NASDAQ.\n
\nTrading is mixed overseas before the opening bell on Wall Street. While Japans Nikkei lost 1.1 percent and Hong Kongs Hang Seng slipped .6 percent, a .7 percent gain in Germanys DAX is pacing a modest advance across Europe.\n
\nIn the US, the economic calendar is light this week until jobless claims and retail sales numbers Thursday.\n
\nWith little to guide the early action, bonds are lifeless in quiet trading Monday morning. The benchmark ten-year Treasury is down 2/32nd and now yields 3.57 percent.\n
\nThe dollar edged down .11 to 89.39 against the Japanese yen. The euro gained .0006 to 1.3670 an ounce.\n
\nCrude oil is flat near $71.25 a barrel, but gold jumped $14 to $1067 an ounce. \n
\nAmong the stocks to watch, Hasbro (HAS) and CVS are trading up on earnings news. Some of the fertilizer names, including Potash (POT) and Mosaic (MOS), are seeing early strength. Motorola (MOT) is trading up after being mentioned positively in Barrons. Home Depot (HD) might help the Dow early after Morgan Stanley upgraded the stock to Overweight.\n
\nNote: we had a little Internet issue this morning, which has been resolved. Sorry for any inconvenience this caused.

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