Hot Option Plays: Risk On, Currency Off

OptionsXpress
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Cusick’s CornerRisk assets, stocks, are quietly holding up while currency markets are weak. Gold traders, GLD traders, should consider looking to the currency trade to flag strength or weakness. This is a tough week to trade on technicals or fundamentals mostly because the larger players are off the desk. This is a market in which you need to be focused and disciplined. See you After Hours.

Stock market averages are holding modest gains with help from economic data Tuesday. Stock index futures pointed to a lower open on Wall Street after the three-day holiday weekend, but the underlying tone of trading improved mid-morning after data showed an index of Consumer Confidence up to 64.5 in December, from 55.2 last month and much better than the 63.5 that was expected. Beyond that, it’s been a light news day. Equity markets were little changed across European and Asian markets. Action is mixed in the commodities markets as well. While crude oil rallied $1.40 to $101.08 per barrel, gold lost $14.2 to $1591.80 an ounce. Meanwhile, the Dow Jones Industrial Average is holding a modest 12-piont gain and the tech-heavy NASDAQ added 8.5 points. CBOE Volatility Index (.VIX) is up 1.17 to 21.90. Volume is light and likely to remain slow throughout the week, with 2.4 million calls and 1.8 million puts traded through 12:30pm ET.

Bullish Flow
Nokia (NYSE:NOK) sees high call volume today. Shares of the Finnish communications company lost 13 cents to $4.79. Meanwhile, options volume on the stock through midday includes 14,000 calls and 1,450 puts. July 7 calls, which are 46.1 percent out-of-the-money, are the most actives. 6,690 contracts changed hands. January 5, February 6, April 7 and July 8 calls on NOK are seeing interest as well. Some investors appear to be taking bullish positions in upside calls on Nokia, perhaps betting that the stock will see brighter days in 2012 compared to this year. 2011 has been a rough year for shareholders. NOK is down 53.5 percent year-to-date.

A sizeable put seller targets Pulte Group (NYSE:PHM) Tuesday. Shares are up 2 cents to $6.10 today and have now rallied more than 70 percent year-to-date. In early options action Tuesday, a block of 16,000 February 6 puts traded on PHM at 47 cents when the market was 47 to 50 cents. Open interest in the contract is only 9 contracts. So, it appears that a put seller initiated the position to open. If so, it’s not necessarily a bullish play, but a bet that shares will hold above $6 through the Feb expiration. If not, and the position is held to expiry, they will be assigned on the puts and be asked to buy the stock at that price level. In that case, the cost basis for owning the stock is equal to $6 minus the credit plus any transaction costs.

Bearish Flow
Rackspace (NYSE:RAX) adds 62 cents to $43.92 and an interesting spread on the San Antonio, TX software developer today is in the February puts. In this trade, the strategist apparently bought 5,000 February 42 puts for $2.55 and sold 6,000 February 36 puts at 80 cents. The 5X6 put ratio spread is a bearish play with a max payout if shares fall to $36 at the February expiration, which represents an 18 percent drop over the next 52 days. There is also additional risk to the downside because not all of the 36 puts are covered by the 42s. RAZ has performed well in recent months – up nearly 40 percent since early-October – and a shareholder might have initiated the spread to help protect or “hedge” recent gains.

A massive spread trades in the PowerShares Bullish Dollar Fund (UUP) Tuesday. Shares are off 6 cents to $22.32 and one strategist sold 68,000 March 23 calls on the ETF at 29 cents and bought 68,000 March 24 calls for 14 cents. 15 cents was collected on this March 23 – 24 call spread and is possibly a closing trade. If so, it’s not necessarily bearish action in UUP, but seems to reflect expectations that shares will hold under $23 through mid-March. The exchange-traded fund tracks the performance of the buck against a basket of foreign currencies and has been trending a bit lower of late. Shares are down 1.3 percent since 12/14.

Unusual Volume
Sears Holdings (NASDAQ:SHLD) options volume is running 5X the (22-day) average, with 32,000 contracts traded and put activity accounting for 62 percent of the volume.

Annaly Capital (NYSE:NLY) options volume is 3X the average daily, with 30,000 contracts traded and put volume representing 63 percent of the activity.

Mead Johnson (MJN) options volume is running 2.5X the average daily, with 15,000 contracts traded and call volume representing 75 percent of the total volume.

Increasing options activity is also being seen in Toll Brothers (NYSE:TOL), Anglogold (NYSE:AU), and Valeant Pharmaceuticals (NYSE:VRX).

Implied Volatility Mover
Sears Holdings (NASDAQ:SHLD) is under pressure and implied volatility in the options on the stock is moving up after the retailer warned that same store sales are down 5.2 percent so far this quarter. Sears also announced plans to shut 100 – 120 Kmart and Sears stores. Shares are down $11.50 to $34.25 and options volume is running 5.5X the daily average. 13,000 calls and 21,000 puts traded on the retailer so far. January 25 puts are the most actives and implied volatility in the options on the stock surged 31.5 percent to 88.

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