Hot Option Plays: Looking For Confirmation

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Cusick’s Corner 02-24-2012
There appears to be no divergence from trend or any flag for potential bearish variance on the landscape from a long term perspective. One short term question mark comes from looking at the transports, $DJT/IYT, which have not confirmed the move in the Dow Jones, so I will watch the transports for a sign of momentum — a break of 5000 could be negative. One other point is that Volatility, VIX, continues to contract, like a spring that is coiled — at some point it will have to uncoil, so this is why I look for some kind of confirmation like the transports. See you After Hours.

Stock market averages are again holding modest gains on a relatively slow news day. Economic data released during market hours Friday morning included the University of Michigan consumer sentiment index, which was up to 75.3 in late-February from an initial reading of 72.5 and better than the 73.0 that economists had expected. New Home Sales hit an annual rate of 321K in January, from an upwardly revised 324K the month before, but better than the 315K that was expected. Not much news flow surfaced from Europe and stock market averages finished mixed. Germany’s DAX added .8 percent and UK’s FTSE was flat. But the euro continues to forge higher grounds and was recently up .7 percent to 1.347 against the buck. Crude remains bid as well and was recently up 90 cents to $108.73 per barrel. However, gold gave up $10 to $1776 an ounce and silver slipped 17 cents to $35.59. Meanwhile, the Dow Jones Industrial Average has traded in a very narrow 43-point range and is up 21 points. The NASDAQ added 13. CBOE Volatility Index (.VIX) dipped another .34 points to 16.46. Trading in the options market is running about the typical levels and is interesting because put volume is outpacing call activity, with 4.1 million calls and 4.5 million puts traded through 12:30pm ET.

Bullish Flow
Alcoa (NYSE:AA) adds 9 cents to $10.55 and is one of 15 Dow stocks holding gains, as the mixed trading on Wall Street continues for another day. Options volume on the aluminum maker through midday is 42,000 calls and 8,550 puts. The top trade of the day is a 10,000-contract block of Mar 11 calls traded for 12 cents per contract when the market was 11 to 12 cents. 23,288 now traded. Volume in Apr 11 calls is 11,515 contracts. Alcoa shares are up 22 percent yea-to-date. The stock made a stab at the $11 level several times earlier this month, but failed to break above $10.92. Some players in the options market might be anticipating another run higher in the stock, but rather buy shares, are purchasing call options that give the right to buy, or “call”, the stock for $11 through the expiration, which is three weeks for March options and eight weeks for the April options.

Trading in Marvell Technology (NASDAQ:MRVL) is active after the company reported earnings after the closing bell yesterday. Shares are down 47 cents to $15.59 on the results and options trading is brisk. 34,000 calls and 11,000 puts traded on MRVL so far, which is 3X the daily average. While March 16 calls have traded almost 10,000 contracts, the biggest trades in MRVL are in the January options after one investor sold 5,000 January 12.5 puts on the stock at $1 per contract, bought 5,000 January 17.5 calls for $1.39, and sold 5,000 January 22.5 calls at 32 cents. In other words, downside Jan 12.5 puts were maybe sold to help finance an upside Jan 17.5 – 22.5 call spread, which is a bullish play that offers it best payout if shares rally to $22.5 or beyond the through the January 2013 expiration. The strategist is probably a willing buyer of the stock for $12.5, a discount of almost 20 percent to current levels, and is therefore willing to write the Jan 12.5 puts.

Bearish Flow
Live Nation (NYSE:LYV), a Beverly Hills, CA entertainment company, is down 53 cents to $9.97 on disappointing earnings news and options volume on the stock through midday includes 34,000 puts and 820 calls. Much of the volume is due to one spread trade; a strategist sold 11,000 April 10 puts on the stock and bought 20,000 April 7.5 puts. The activity appears to be a roll. That is, the investor is selling to close a position in the now in-the-money April 10 puts and opening a new bearish position in the out-of-the-money put options. The strategist might have correctly anticipated the weakness in the stock and is now bracing for further losses. Or, a substantial LYV shareholder might have initiated the spread to adjust a hedge against a stock position.

iShares MSCI Europe, Far East, and Australia Fund (EFA) was the subject of a substantial put spread as well. EFA, which hold shares of companies from Europa, the Far East, and Australia, is up 47 cents to $55.29 and, in morning trading, one investor bought 81,200 May 52 puts on the fund for $1.38 and sold 81,200 May 43 puts at 26 cents. The spread, for a $1.12 net debit, is a bearish play that would offer its best payout if shares fall to $43 through the May expiration, or a 22.2 percent swoon over the next three months. The spread traded 121,000X on the day and was possibly being opened to hedge the risk of another round of volatility in global equity markets in the months ahead.

Unusual Volume
Salesforce.com (NYSE:CRM) options volume is running 4.5X the (22-day) average, with 133,000 contracts traded and put activity accounting for 66 percent of the volume.

Chelsea Pharmaceuticals (NASDAQ:CHTP) options volume is 12X the daily average, with 80,000 contracts traded and call volume representing 79 percent of the activity.

SPDR Homebuilder ETF (XHB) options volume is running 2.5X the average daily, with 67,000 contracts traded and put volume representing 88 percent of the total volume.

Increasing options activity is also being seen in Nokia (NYSE:NOK), Alpha Natural Resources (NYSE:ANR), and Comcast (NASDAQ:CMCSA).

Implied Volatility Mover
Implied volatility in the options on Dish Networks (NASDAQ:DISH) is moving up amid weakness in the stock and high options volume today. Shares, which gained 1.6 percent after earnings were reported yesterday morning, have given back the gains and are down 84 cents to $28.78. Meanwhile, trading in the options on the stock is brisk today. 15,000 calls and 4,420 puts so far, which is 8X the daily average. It’s not clear what is driving the relative weakness in the stock or high options volume today, as there are no headlines on the ticker. Nevertheless, levels of implied volatility in DISH options are moving up 20 percent to 39 on the day.

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