Hot Option Plays: Bulls Holding

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Cusick’s Corner 01-23-2012
The choppy trade continued and the bid did firm into the close. The market had leadership from Tech, XLK/QQQ while the Financials, XLF, were the buoys. We did see Energies, XLE, and Commodities, JJG, pick up as well when Dollar weakness, UUP, continued through the day. Because of today’s mixed trading and apparently bullish tide, along with low to moderate volatility landscape — bullish at-the-money debit call spreads could be the strategy of choice. With Feb the front month on the boards, those bulls out there who are chopping at the bit could look at their bullish ideas and see if this is a potentially good fixed risk and reward strategy for the next 30 days. See you Midday.

Mixed trading continued Monday. With no economic data until Wednesday’s report on Pending Home Sales and only a handful of earnings reports, there wasn’t much news to guide the morning action on Wall Street. Trading was orderly across the Eurozone despite ongoing concerns about the debt crisis. The euro traded up .7 percent to 1.3025 against the buck and equity markets moved modestly higher in France in Germany. Meanwhile, crude oil was up $1.43 to $99.76 and gold gained $13.3 to $1677.30 an ounce. On Wall Street, the Dow Jones Industrial Average lost 11 points and the tech-heavy NASDAQ gave up 2.5. However, the S&P 500 gained .62 points to 1,316.00.

Bullish
Hovnanian Enterprises (NYSE:HOV) lost 6 cents to $2.36 and options on the homebuilder were actively traded today. About 10,000 calls and 850 puts traded, which is 4.5X the daily average for the stock. The top trade was a 910-lot of February 3 calls traded at the 10 cent asking price. At the end of the day, 5,900 February 3 calls traded on the stock against 1,440 in open interest. The contract is 27.1 percent out-of-the-money and expires in 25 days. February 2.5, March 3, and March 3.5 calls on HOV were busy as well. Upside call buyers were apparently driving the flow in the name today and implied volatility was up 15 percent to 108. The bullish action might be a play on the stock’s recent resurgence. Although down today, HOV has surged 62.7 percent so far in 2012. Yet, shares are still 44.6 percent below the levels seen a year ago.

Bullish trading was also seen in Chesapeake (NYSE:CHK), Marvell Technology (NASDAQ:MRVL), and Znga (ZNGA).

Bearish
Pre-earnings action is picking up in Starbuck’s (NASDAQ:SBUX). Shares lost 81 cents to $47.34 today ahead of earnings, which are due out Thursday afternoon. 18,000 puts and 11,000 calls traded on the stock. Most of today’s options action was in smaller sizes. The largest trades were part of a spread, in which the investor bought 203 February 48 puts on the stock for $1.80 and sold 203 February 44 puts at 41 cents. This Feb 48 – 44 put spread, for a $1.39 net debit, traded multiple times today and volume in both contracts was more than 3,300. Some investors might have been buying this out-of-the-money put spread to help hedge the stock ahead of the report. Like many other companies, SBUX can sometimes see a volatility reaction to the earnings release. For example, the stock jumped 6.7 percent the last time the company reported on 11/4/11.

Bearish trading was also seen in McMoran (NYSE:MMR), Deans Foods (NYSE:DF), and Gannett (NYSE:GCI).

Index Trading
CBOE Volatility Index (.VIX) edged up .39 to 18.67 and snapped a three-day 17.7 percent losing skid Monday. Still, the index is down 32.8 percent since November and heavy trading in options on the index continues for another day. 265,000 puts and 201,000 calls traded in the VIX pit today. The largest trade was a buyer of 15,000 February 19 puts on the index for 65 cents per contract. At the end of the day, 77,700 VIX Feb 19 puts traded. Market action has been very slow so far in 2012. Today, for example, the S&P 500 added just .6 points. The 30-day historical or actual volatility of the S&P 500 is now just 10.3 percent. Sine VIX tracks the expected volatility priced into S&P 500 index options, some investors might be buying puts on the VIX on expectations that the very low levels of actual or historical market volatility will send the index even lower in the weeks ahead. That is, VIX might continue moving lower and begin to better reflect the actualized volatility of the S&P, which is only 10 percent over the past thirty days.

ETF Action
Options on the US Natural Gas Fund (UNG) were heavily traded Monday. Shares of the ETF bounced back to life today and gained 46 cents to $5.55 after natural gas rose 27 cents to $2.62. Natty gas prices have been under pressure in recent months and fell to their lowest levels since 2002 last week amid warmer-than-usual winter weather and increasing natural gas stockpiles. Today, however, prices were up and helped higher by news that Chesapeake, the second largest natural gas producer in the United States, is cutting production to help shore up prices. UNG was up on the news and options on the ETF were heavily traded. 79,000 calls and 32,000 puts traded. Speculators were active in the February 6 calls, which are 45 cents out-of-the-money after today’s move. 21,377 traded. February 5 and April 6 calls were busy as well.

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