A Stronger Market Ahead?

The unemployment rate remained unchanged in December at 10%, but the nonfarm payrolls disappointed. But the market showed signs of strength this morning as the S&P 500 SPDRs (SPY) remained relatively unchanged at $114.16 (down just three cents). The January 114 straddle is trading at $1.95, compared to the same straddle that closed yesterday at $2.22. This means investors are expecting a mere 1.7% move from $114 going into January expiration.

Yahoo (NASDAQ: YHOO) is scheduled to announce earnings per share of 11 cents on Jan. 26 after the market closes, and the stock climbed just one cent to $16.71 during morning trading. We saw an investor buy the July 15/20 strangle for $1.10 looking for big moves in either direction. This investor could be long YHOO stock, and buying the puts as a hedge and buying the calls looking for upside. The July 20 calls and the July 15 puts have crossed the tape more than 4,000 times each.

A familiar trade in Human Genome Sciences (NASDAQ: HGSI) crossed the tape out of the gate: a February series call butterfly. HGSI shares dropped 82 cents to $30.32 during morning trading following a downgrade from Goldman Sachs to neutral from buy. We saw a bullish investor sell two February 33 calls, and buy one February 28 call and one February 35 call for two straight days. The investor’s goal is for the stock to trade as close to $33 as possible to make the maximum profit. This will be achieved if volatility declines between now and February expiration.