Hot Option Plays: A Little Contrarian

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Cusick’s Corner 02-06-2012
My inner contrarian is playing games with my strategy plays. This is a very bullish, complacent market with the VIX, 17.91, well under 20, Put/Call ratios below 1 and volumes have been very low for the most part into Friday, where volume came in for the first time this new year. As I have mentioned throughout this run, the trend is up, this may be a time where a tough grind or healthy pullback could come into play. The catalysts this week from a headline perspective could be Greece and Iran. With Crude pulling back into the midday, it seems to be acting as discussed last week and because of the continual “head fake” headlines concerning an agreement on Greek debt coming soon, I am trading strategically neutral to slightly defensive. See you After Hours.

Stock market averages are showing modest losses amid concerns about Greece, but the morning decline on Wall Street has been orderly through midday. Global investors are worried about the debt crisis after another deadline passed without a firm deal between Greece and its creditors. The country is at risk of defaulting on debt next month and a deal is considered key to avoid a very messy situation for Eurozone banks and financial markets. However, while stock market averages fell across Europe in morning trading, the losses were pared by the close and Germany’s DAX battled back to finish flat. France’s CAC 40 index lost .7 percent and UK’s FTSE lost just .2 percent. The euro, which fell back to within striking distance of 1.30 against the buck, had rallied back and is now down .2 percent to 1.3125. With no economic data until Consumer Credit tomorrow afternoon, Wall Street seems to be taking its cue from action overseas as well. The Dow Jones Industrial Average is down 42 points and 27 points off session lows. The NASDAQ gave up 7.5 points. CBOE Volatility Index (.VIX) is up .80 to 17.90. Overall options volume is running at relatively slow levels, with 3.3 million calls and 2.8 million puts changing hands by 12:15pm ET.

Bullish Flow
Dryships (NASDAQ:DRYS) has seen a flurry of activity since Friday afternoon. Shares of the bulk shipping company are up 27 cents to $2.67 on volume of 16.5 million shares. By way of comparison, typical volume through midday is about 2.5 million. Options on the stock are heavily traded. 28,000 puts and 1,620 calls so far. The order flow is mostly scattered across a number of different February, March and June calls on the stock. February and March 2.5 calls, which are now 17 cents in-the-money, are the most actives. Some players might be liquidating positions after a two-day 24.5 percent surge in the share price. February, March and June 3 calls are seeing active trading as well, with some traders probably taking new positions in out-of-the-money calls in anticipation of additional gains in DRYS. No news on the ticker to explain the flurry of activity in the name late-Friday and early-Monday.

Synta Pharmaceuticals (SYNTA), a Lexington, MA biotech, is trading up 7 cents to $5.05 and options volume on the stock is running 3X the daily average after 4,040 puts and 90 calls traded in the name. The top trade is a 3,470-contract block of August 5 puts traded on the $1 bid. The market was $1.00 to $1.25 at the time and this looks like an opening seller because open interest is only 145 contracts. 4,020 August 5 puts have traded on SNTA so far today and some players might be selling these puts on the view that shares will hold above $5 through mid-August and the puts will expire worthless. If not, they’re willing to buy the stock (get assigned on the puts) for $5 per share. The stock has performed well lately and is up nearly 60-percent since mid-November. No recent headlines in the name. The company will present at a biotechnology industry conference a week from today.

Bearish Flow
Vulcan Materials (NYSE:VMC) is up 26 cents to $45.05 and has rallied 34.3 percent since Martin Marietta (NYSE:MLM) made a hostile takeover bid for the company in early-December. VMC has rejected the offer. Some investors might now be looking to hedge their gains in VMC shares heading into earnings news. More than 3,100 February 45 puts have traded in VMC today. Open interest is 106 contracts and 96 percent of the volume traded at the asking price, which suggests opening buying. Players might be concerned that the stock will see volatility around a Feb 15 earnings report, which is the Wednesday before February options-expiration Friday. MLM might also comment about its takeover attempts of VMC this week. MLM is due to report earnings tomorrow morning.

The largest options trade across the exchanges through midday Monday is in the PowerShares QQQ (QQQ). Shares are off 7 cents to $61.98 and the big trade is a 30,000-contract block of March 54 puts traded on the 14-cent bid. It coincided with a 10,000-contract block of March 60 puts on the 81-cent asking price and looks like part of a March 54 – 60 (3X1) put ratio spread. An investor might have bought this spread to hedge short-term risk of holding a portfolio of large cap NASDAQ stocks. QQQ is an exchange-traded fund that holds the NASDAQ 100 names, which includes the largest 100 non-financial stocks that trade on the NASDAQ Stock Market. The 1X3 is a bearish play that makes its best profits if shares fall to $54 by the March expiration, or a 12.9 percent decline in the NASDAQ 100 over the next 39 days.

Unusual Volume
Zynga (ZNGA) options volume is running 2.5X the (22-day) average, with 44,000 contracts traded and call activity accounting for 67 percent of the volume.

Solar Winds (SWI) options volume is 27.5X the daily average, with 30,000 contracts traded and put volume representing 86 percent of the activity.

Delphi Automotive (DLPH) options volume is running 15.5X the average daily, with 29,000 contracts traded and call volume representing 99 percent of the total volume.

Increasing options activity is also being seen in Dryships (NASDAQ:DRYS), Encana (NYSE:PBY), and Pitney Bowes (NYSE:PBI).

Implied Volatility Mover
Sysco Systems (NYSE:SYY) implied volatility is moving lower after earnings were reported. Shares are down $1.57 to $29.33 and options volume is running 2.5X the daily average of the news. 5,740 puts and 3,760 calls traded so far. The top trades are lots of February 30 and 31 puts traded on the bid. Some players are possibly selling puts and exiting trades, as the contracts are in-the-money and expiring in 11 days. The same contract saw opening activity Friday ahead of the report. Bearish flow in SYY was highlighted in Friday’s closing report. Implied volatility in the options on the stock is down 19 percent to 17 since that time.

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