Hot Option Plays: Metals & Miners Lead The Downside

OptionsXpress
updated | Author's Website

Cusick’s Corner
The action into the After Hours is what many traders and technicians have been anticipating. Last week I picked up on this flag — the lagging nature in the Transports, IYT, and we saw the metals and miners, XME, SLV, GLD, all pullback in the morning which continued into the afternoon. Strength in the Buck, UUP, along with the continued pullback in Metals, GLD, created late day momentum to the downside. Now bonds did pull off early and held into the close, so the trend is getting some support from this action. I am going to watch these dips closely to see how quickly we get a potential pickup. See you Midday.

Stock market averages opened steady, but finished lower amid increasing volatility in global financial markets Wednesday. Economic data was in focus early after GDP showed an increase to an annual rate of 3 percent in the fourth quarter, which was improved from an initial reading of 2.8 percent and .2 percent better-than-expected. Chicago PMI, a gauge of regional manufacturing activity, rose to 64 in February, from 60.2 last month and much better than the 60.0 that had been expected. Then, Federal Reserve Chairman Ben Bernanke took the spotlight and, when the head of the Fed failed to hint at another round of quantitative easing, Treasury bonds saw a volatile move to the downside. Gold, silver and copper prices sank, while the dollar made a run higher. Meanwhile, the euro was under pressure, falling 1 percent against the buck, after the European Central Bank’s highly anticipated refinancing operations went roughly as planned. Yet, the volatility in other markets didn’t spill over into the equities until the final two hours of trading. The Dow was basically flat at midday, but finished down 53 points. For the month, the industrial average added 319 points.

Bullish
Gap Stores (NYSE:GPS) saw interesting trading activity ahead of same store sales numbers. Individual retailers will be reporting results Thursday morning and analysts expect Gap to report a 1.4 percent decline in February sales. Shares lost 35 cents to $23.36 ahead of the results. However, sentiment in the options market seemed somewhat bullish. 21,000 calls and 9,700 puts traded on the apparel retailer today. March 25 calls, which are 7 percent out-of-the-money and expiring in 16 days, were the most actives in GPS. 13,060 traded. Some investors were possibly taking positions in the contract on hopes for a rally Thursday when the company releases its results. June 23 calls, April 22 puts, and March 23 puts on Gap Stores were actively traded as well and levels of implied volatility in the options was up 4.5 percent to 29.

Bullish trading was also seen in Ivanhoe Mines (NYSE:IVN), Equinix (NASDAQ:EQIX), and Sara Lee (NYSE:SLE).

Bearish
Finisar (NASDAQ:FNSR) saw interesting trading activity late-Wednesday. Shares of the Sunnyvale, CA networking company were down $1.50 to $20.29 in the regular session and one strategist sold 3,600 March 23 calls on the stock at 50 cents per contract to buy 3600 March 20 puts for $1.05. The bearish combo traded more than once and more than 5,600 of both contracts traded on the day. A shareholder might have initiated the trade to hedge or “collar” the stock ahead of earnings. FNSR shares have subsequently dropped to $18.25, or an additional 8.8 percent, in extended trading after the company released a profit report that fell short of some expectations.

Bearish trading was also seen in Central European Distribution Group (NASDAQ:CEDC), Safeway (NYSE:SWY), and Ann Taylor (NYSE:ANN).

Index Trading
Put volume picked up in the index market today. 828,000 puts traded on the S&P 500 Index (.SPX), the S&P 100 Index (.OEX) and other cash index products, which is about double the levels seen Tuesday, according to Trade Alert data. The S&P 500 gave back 6.5 points to 1,365.68 today, but gained 4.1 percent for the month. Meanwhile, CBOE Volatility Index (.VIX) edged up .47 to 18.43 Wednesday and fell 5.2 percent during the month of February. VIX typically moves lower when the S&P 500 ticks higher. In options action, April 18, 21, and 30 puts on the VIX were the most active index options contracts today, with about 50,000 traded in each. Much of the volume was due to spread trading. For example, one strategist bought 20,000 April 18 – 20 put spreads on VIX for $1.25 per spread and is possibly betting that VIX will settle below 18 at the April expiration.

ETF Action
iShares Silver Fund (SLV) saw another day of heavy trading. Shares gained $1.47 to $35.83 Tuesday after silver prices move up more than $1.50 to recapture $37 for the first time since September. Wednesday, however, SLV plummeted $2.28 to $33.55 on heavy volume of 91 million shares, which is 5X the typical share volume in the product, after silver sank $2.42 to $34.62 an ounce. The big slide in the metal stirred up a flurry of options activity in SLV as well. 397,000 calls and 220,000 puts traded on the ETF. March 35 and 36 calls on the silver fund, which were falling out-of-the-money after today’s slide and have 16 days of life remaining, were the most actives. Some investors were likely selling these upside calls and scrambling to close positions amid volatility in the underlying. Others might have been buying the calls on the view that today’s dramatic one-day drop is an overreaction.
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