Two Options Worth Watching This Week

01/25/2011 3:03 am EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

Traders this week are taking aim at Human Genome Sciences (HGSI) and VMware, Inc. (VMW), with volume accelerating beyond the usual level for both equities. Back-month options are popular on HGSI, while newly front-month, February-dated contracts are the options of choice on VMW.

Option volume ramped up to about six times the norm yesterday on HGSI, with roughly 17,000 calls and 6,544 puts changing hands so far. Most active by a mile is the stock's April 25 call, where 10,444 contracts have traded.

Yesterday's volume at the April 25 strike is easily outstripping open interest of just 2,267 contracts, so it's safe to say that new calls are being added here. A block of 9,950 contracts crossed the tape earlier near the ask price, suggesting they were most likely purchased.

Despite a general lack of news, HGSI is up 1.6% at last check to trade just shy of $25. The stock is attempting to regain a foothold atop its 50-day moving average, which acted as stubborn resistance from October 2010 through early January.

Click to Enlarge

Meanwhile, VMW attracted some attention ahead of last night's earnings announcement. By mid-afternoon, 5,156 calls traded on the tech stock, compared to about 10,000 puts, representing four times the equity's average daily volume.

Taking a closer look at yesterday's major block trades, it looks as though one bearish bettor constructed a long put spread by purchasing VMW's February 85 put and simultaneously selling the February 80 put. In other words, this trader is banking on a short-term retreat from VMW's current perch north of $88.

Like HGSI, VMW is currently doing battle with its 50-day moving average. The shares were down 2.6% at the time of the above spread placement and were resting heavily on this trend line support, which hasn't been breached on a daily closing basis since Nov. 23.

We’ll see what effect the earnings report has on that trend line.

By Elizabeth Harrow, contributor, Schaeffer’s Trading Floor Blog

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