Hot Option Plays: Can The NASDAQ Lead Rally?

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Cusick’s Corner 02-23-2012
This was a tough read on the close. I just didn’t see a big enough close on the S&Ps to be convinced that an earnest move to the upside will have the staying power. I will be monitoring the NASDAQ to see how it reacts as it breaks through resistance at 2600. We could see some sellers come in overnight at these levels but it will be very interesting to see how the underinvested react if there is a bigger move to the upside. Not much more to build on today. See you Midday.

Stock market averages were up through midday and then action turned narrow and range-bound Thursday afternoon. The underlying tone was cautious early and economic news was in focus after the Labor Department reported that Jobless Claims were unchanged at 351,000 last week. Economists were expecting an increase of 4,000. However, a slide in Hewlett Packard (NYSE:HPQ) shares, which finished down 6.5 percent on earnings news, seemed to weigh on the Dow Jones Industrial Average at the open. Yet trading was orderly across the Eurozone and the euro had rallied back to 1.335 on the buck after, as expected, Greek officials approved a debt swap law. The metals were again shining. Gold gained $10.7 to $1782 an ounce and silver added $1 to $35.26. Crude oil was little changed midday, but then surged in afternoon action. Crude was recently up $2.11 to $108.39 per barrel. Meanwhile, the Dow Jones Industrial Average was helped to higher ground with help from IBM, P&G and 18 other components. The Dow added 46 points on the day and closed 102 points off session lows. The NASDAQ added 23.8 points.

Bullish
A handful of big retailers were up on earnings today. Sears Holdings (NASDAQ:SHLD) gained $9.72 to $61.80 per share and Dillards (NYSE:DDS) added $5.63 to $57.63. Meanwhile, Target (NYSE:TGT) gained $1.53 to $54.50 after its earnings topped Street estimates and options volume on the retailer was 4X the daily average. About 48,000 calls and 10,000 puts traded on the retailer today. The top trade of the day was a diagonal spread, in which the strategist sold 5,000 March 55 calls on the stock at 63 cents and bought 5,000 April 57.4 calls for 40 cents. The Mar 55 – April 57.5 call spread, for a 23-cent net credit, is possibly rolling activity or maybe a view that the stock will hold below $55 (+.9%) through the March expiration (three weeks) and then rally beyond $57.5 (+5.5%) through the April expiration (56 days).

Bullish trading was also seen in Ford Motor (NYSE:F), Kroger (NYSE:KR), and Cisco Systems (NASDAQ:CSCO).

Bearish
One of the largest options trades in Thursday’s trading session was in Frontier Communications (NYSE:FTR). Shares, which staged a three-day 18 percent rally late last week, lost 2 cents to $4.57 today and are down 4.4 percent since Friday. In afternoon options trading, 55,000 May 4 puts were sold on the stock at 15 cents and 55,000 May 5 calls sold at an average of 12.5 cents. The hefty options blocks traded on PHLX, where a source on the exchange confirms that this May 4 – 5 strangle was sold for an average of 27.5 cents. If so, it’s not necessarily a bullish or bearish play on the Stamford, CT telecomm. Instead, it seems to reflect expectations that the stock will hold in a range around these levels, or between the $4 and $5 strike prices, through the May expiration.

Bearish trading was also seen in Edison International (NYSE:EIX), Questcor Pharmaceuticals (NASDAQ:QCOR), and Rock Tenn (NYSE:RKT).

Index Trading
Trading remains active in the index pits, even as stock market averages have traded in narrow ranges in recent weeks. After losing 4.55 points yesterday, the S&P 500 Index (.SPX) added 5.80 points to 1,363.46. Total options volume in the S&P 500, CBOE Volatility Index (.VIX) and other index products was 597,000 calls and 736,000 puts. VIX, which tracks the expected volatility priced into S&P 500 index options, lost 1.39 to 16.80. Meanwhile, the most actively traded index contract Thursday was the VIX March 30 call. 82,000 contracts traded. Some investors might have been buying theses upside calls on the volatility index on concerns the recent period of low market volatility will be short-lived. March options on VIX expire in 26 days.

ETF Action
A very large options trade surfaced in the iShares FTSE China 25 Index Fund (FXI) Thursday. Shares lost 18 cents to $40.15 on the day and a 50000-contract block of January 25 puts traded on the ETF for 91 cents per contract. The block traded electronically on the International Securities Exchange and data from the ISE indicate an investor sold the block to open a new position. If so, the strategist is probably a willing buyer of FXI shares at $25, or 37.7 percent below current levels. FXI has a 52-week low of $28.61 set on 10/4. Shares have not traded for less than $25 since March 2009.

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