Hot Option Plays: Bid Pops Back In

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Cusick’s Corner
Nice recovery into the close and the bid did again come in, getting the market off the lows of the day. The S&Ps closed right at the 1315 level, so I am feeling better about the prospects of the bid. With the GDP and Michigan Sentiment due out in the morning, the markets could have some potential catalysts early on and the shorts of today could get further squeezed. See you Midday.

A modest wave of selling pressure surfaced Thursday afternoon and sent stock market averages lower into the close of trading. The underlying tone on Wall Street was bullish early after European equity markets rallied on optimism for Greece and the euro recaptured the 1.315 level against the buck. The Dow Jones Industrial Average opened higher to extend a rally that gathered momentum Wednesday afternoon when the FOMC concluded its latest rate policy meeting and pledged to keep rates low for the foreseeable future. Today’s economic news was mixed, however, after durable Goods surprised to upside after increasing 3 percent in December. Economists were expecting an increase of 2 percent. Separate data showed Jobless Claims up 21,000 to 377K in the third week of January, which was in-line with expectations. A third report released later was the List of Leading Economic Indicators for December, which was up .4 percent and .3 percent less than expected. Earnings results painted a mixed picture as well. Caterpillar (NYSE:CAT) helped the Dow Jones Industrial Average after shares gained 2.1 percent on earnings. Netflix, JetBlue and Nokia were also up on profit results. Sandisk and AT&T saw post-earnings weakness. Trading was mostly range-bound into midday, but then stock market averages faltered along with the euro in afternoon action. The catalyst for the decline seemed to be headlines related to bank write-offs of troubled Greek debt. For whatever reason, the Dow gave up its early gains, but a real sell-off never materialized. At the closing bell, the Dow was down 24 points. The NASDAQ gave up 13 points.

Bullish
Myland Labs (NYSE:MYL) was the subject of an interesting options trade Thursday. Shares of the Canonsburg, PA pharmaceutical company didn’t do much on the session. The stock lost a penny to $21.20 on volume of 6.4 million shares. Average daily volume is 4.9 million. Meanwhile, 40,000 options traded on the stock, which is 6X the daily average. Much of the activity was driven by one spread strategy. In this advanced options play, the strategist sold 12,000 April 18 puts on the stock at 45 cents per contract, bought 12,000 April 22 calls for $1.06 and sold 12,000 April 25 calls at 23 cents. In essence, April 18 puts were sold to buy an April 22 – 25 call spread and a 38-cent debit was paid for the package. The initiator of the spread is probably a willing buyer of the stock for $18 per share, which is 15 percent below current levels, and they are therefore willing to write (sell to open) the April 18 puts. However, buying the call spread also allows them to participate if shares rally beyond $22 through the expiration. Today’s bullish spread trader might be expecting the company to deliver some positive news when it reports earnings and hosts an Investor Day on February 21.

Bullish trading was also seen in United Rentals (NYSE:URI), LSI Logic (NYSE:LSI), and Newfield Exploration (NYSE:NFX).

Bearish
Deutsche Bank (NYSE:DB) shares hit a high of $44.90 this morning after Germany’s DAX moved up 1.4 percent, but the gains were lost Thursday afternoon and shares of the German bank closed down 23 cents to $43.40. Meanwhile, options volume on the stock was 3.5X the daily average after roughly 24,000 calls and 2,600 puts traded in the name. The top trade was a 9,500-contract block of April 40 puts traded for $2.45 per contract. An investor bought the block to open a new position, according to data from the options exchange. At the end of the day, 11,530 April 40 puts traded on DB against 2,027 in open interest. Some investors might be buying the puts to hedge stock amid concerns about the unfolding debt crisis and ahead of Deutsche Bank’s earnings, which are due out on February 2.

Bearish trading was also seen in Athena Health (NASDAQ:ATHN), Ford Motor (NYSE:F), and Radian Group (NYSE:RDN).

Index Trading
Dow Jones industrial Index (.DJX) saw more options volume than usual. Trading under the ticker DJX, the index is designed to equal 1/100th of the Dow Jones Industrial Average. Since the Dow gave up 22.33 points to 12,734.63 today, the mini index lost .22 points to 127.35. Options volume on the DJX hit 3X the daily average after 5,650 calls and 8,190 puts traded on the index. Most of the volume was in the March 125 puts and calls and the December 125 puts and calls. All four contracts traded 2,500 contracts (more than 10,000 combined). One or more investors might have been buying 125 straddles on the index (buying near-the-money puts and calls) and believes that the Dow may make a substantial move higher or maybe lower in the months ahead. Straddle buyers are trading volatility and also expecting the underlying stock or index to move fast enough to offset the negative impact of time decay.

ETF Action
iPath S&P 500 VIX Short-term Futures ETF (VXX) lost a penny to $26.64, even as the CBOE Volatility Index (.VIX) ticked .26 points higher to 18.57. Shares of the exchange-traded fund don’t always move in the same direction as the volatility index because the fund tracks volatility through VIX futures – not the spot index. VXX is down 45.9 percent since November 25, which compares to a 46.2 percent loss in the volatility index. Since the extremes seen in early October, VIX is off 59.1 percent and VXX has tumbled 55 percent. Now, some investors may believe that there may further declines in VXX. 131,000 puts and 59,000 calls traded on the ETF today. February 24, 25, and 27 puts, which expire in 22 days, were the most actives. April and Jun 19 puts on VXX saw heavy trading as well.

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