Hot Option Plays: Small Caps Halt Rally

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Cusick’s Corner 03-02-2012
The Small Caps and the NASDAQ struggled, both finishing the day on the lows. The reason that the underperformance and now weakness in the Small Caps worries me is because the companies in this index, RUT/MDY, are typically small domestic firms. We may know them as regionally powerful firms and if they are under pressure this could be a potential flag for problems economically building in that region and that sector. In other words, this could be a signal that challenges at home are in the works. If we see this pressure continue, then it may be a time to reevaluate short term strategic approaches. Have to run, we are at a large investor forum in Miami. Have a good weekend.

Stock market averages slumped in uninspired market action Friday. With no domestic economic data on the calendar, focus turned overseas where the euro lost .8 percent and is back to 1.32 on the buck. The European currency weakened Friday after yields on Spanish bonds rose. Borrowing costs (bond yields) in Spain increased after a government official warned that the country’s budget deficit target is now 5.8 percent of GDP. Concerns that the debt crisis is still a risk to financial markets seemed to weigh on early trading on Wall Street. At the same time, crude oil is down $2.15 to $106.69 per barrel after Saudi officials denied reports late-Thursday that a key pipeline had been damaged. Gold lost $9 to $1713 an ounce. Meanwhile, stock market averages slumped, but finished little changed. The Dow Jones Industrial Average gave up 2 points on the day, but finished up 50 points from session lows. The NASDAQ gave up 12.8 points.

Bullish
Verizon (NYSE:VZ) added 24 cents to $38.67 and was one of fifteen of the Dow thirty stocks to move higher on another mixed day of trading Friday. Options on the phone company were actively traded. 24,000 calls and 16,000 puts traded in Verizon Friday. The top trade of the day was a 10,000-contract block of March 39 calls traded for 23 cents on the Chicago Board Options Exchange. An investor bought the block, according to a source at the CBOE. If so, it’s a bullish short-term play. March 39 calls on VZ are now .9 percent out-of-the-money and expire two weeks from today. 11,099 traded on the day. VZ slipped on earnings on 1/25, but has been grinding higher since that time. Shares are up 2.7 percent since January.

Bullish trading was also seen in United Continental (UAL), Southwest Airlines (NYSE:LUV), and Shutterfly (NASDAQ:SFLY).

Bearish
Staples (NASDAQ:SPLS), which lost 8.4 percent Wednesday after the company reported disappointing earnings, edged down 3 cents to $15.36 today. Options order flow on the office supplies retailer was noteworthy. More than 30,700 January 15 calls traded on the stock. The top trade was a 9,581-contract block of Jan 15 calls traded at $1.65 on the International Securities Exchange. Data from the ISE indicate an investor sold the call to open a new position. In fact, with 99 percent of the volume in SPLS Jan 15 calls traded on the bid today, it appears that call writers were dominating the action and looking for shares to hold near $15 or below through the January 2013 expiration. Shareholders might have been initiating the trades against stock, as part of a covered call or buy-write strategy.

Bearish trading was also seen in Ann Taylor (NYSE:ANN), FTI Consulting (NYSE:FCN), and Keycorp (NYSE:KEY).

Index Trading
The S&P 500 index (.SPX) lost 4.46 points to 1,369.63 Friday, but eked out a miniscule 3-point gain on the week. There hasn’t been much volume or volatility lately. For instance, 541,000 calls and 648,000 puts traded on the S&P 500 Index, the S&P 100 Index (.OEX) and other cash index products Friday, which is about 93 percent the recent average daily levels, according to Trade Alert data. Meanwhile, CBOE Volatility Index (.VIX), which tracks the expected volatility priced into SPX options, ticked up .03 to 17.29 and the most actively traded index contract on the day was Jun 29 calls on the volatility index. More than 97,000 traded, as some investors might be taking positions in the contract on the view market volatility is likely to increase at some time between now and mid-June.

ETF Action
SPDR Metals and Mining Fund (XME) lost $1.01 to $51.44 and options on the ETF hit 3.5X the daily average. 51,000 puts and 1,440 calls traded on the fund today. In morning trading, one investor sold 26,000 March 51 puts on the ETF at 82 cents per contract. It’s possibly a closing trade. The contract is 44 cents out-of-the-money, expires in two weeks and has 42,699 in open interest. Later in the day, a 14,900-contract block of June 51 puts traded for $3.50 per contract. At the end of the day, 21,345 Jun 51 puts on XME changed hands and the flow looks opening (volume exceeds open interest). Taken together, the action hints at rolling activity, as an investor was closing out a position in March downside puts on XME, but looking to keep bearish exposure by opening a new position in June puts. A fund manager with significant positions in metal and mining stocks might have initiated the trades as a hedge.

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