Hot Option Plays: Ripples Turn Into Waves

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Cusick’s Corner 03-06-2012
I expected ripples but instead we are seeing waves. This market is ugly, meaning the intraday trend of down looks to have the strength going into the After Hours. For the longs — what has given a glimmer of hope is the ability of stocks to bounce and counter the market trend, i.e. AAPL well off the 510 lows. This is where the fortitude of the longs will be tested and I will be watching the 1337 level on the S&Ps to potentially hold into the close. See you After Hours.

Stocks moved broadly lower around the globe in volatile market action Tuesday. The day after China, the world’s second largest economy, lowered its 2012 economic growth forecast; Hong Kong’s Hang Seng lost another 2. 2 percent. The volatility spilled over into early trading in Europe, where disappointing data from Spain and Italy weighed on markets Monday. Market averages continued falling Tuesday and Germany’s DAX paced a decline with 3.4 percent loss amid concerns about the risks stemming from the unfolding debt crisis. Greek officials are attempting to reach a deal with creditors in order to secure a second round of bailouts and avert a default. A March 8 deadline for Public Sector Involvement [PSI] deadline looms. The euro is trading down .8 percent to 1.311 against the buck. The decline overseas set the table for morning weakness on Wall Street. Uncertainty about the Super Tuesday Republican race, tensions with Iran, and Friday’s jobs data are possibly weighing on sentiment as well. The Dow Jones Industrial Average is down 200 points through midday and the tech-heavy NASDAQ gave up 33 points. CBOE Volatility Index (.VIX) jumped 2.70 to 20.75. Trading in the options market is very active and clearly more defensive, with 5.6 million calls and 5.8 million puts traded by 12:30pm ET.

Bullish Flow
Options on James River Coal (NASDAQ:JRCC) are actively traded today. Shares hit a new 52-week low of $5.01 early, and down more than 75 percent since June 2011. However, the stock has erased its early losses Tuesday and is now up 8 cents to $5.44 in active trading of 2.9 million shares. Meanwhile, 6,430 calls and 1,235 puts traded on the coal producer, which is 2X the daily average for JRCC. June 7 calls are the most actives. 4,630 traded. April 6 calls have traded 1,105 contracts. Some investors might be expecting the stock to rebound in the months ahead, but rather than buying shares outright today, they are buying calls that lock in the right (but not the obligation) to buy shares at a specific price (strike price) through a specific period of time [[expiration]].

Tyson Foods (NYSE:TSN) is trading down 30 cents to $19.09 and options on the meat producer are more active than usual. 3,030 calls and 444 puts traded on the stock through midday. By way of comparison, typical volume is roughly 1,000 contracts. April 19 calls, which are 9 cents in-the-money, are the most actives. 1,665 traded and, with 93 percent trading at the asking price, it appears that buyers are dominating the action. March 18 and 19 calls on TSN are seeing interest as well and levels of implied volatility in the options on the stock is up 12.5 percent to 24.5. Davenport upgraded the stock to Buy today and the company is due to present at a Goldman Sachs Agricultural Biotech conference tomorrow.

Bearish Flow
Proshares UltraShort Silver (ZSL) is up 71 cents to $10.39 on another rough day for the metal Tuesday. Silver prices are down another 97 cents to $32.73. Meanwhile, ZSL, which is a leveraged product designed to move inverse to the white metal, has rallied 23.5 percent in the past week. Options volume in the ETF is running 2X the daily average. 8,200 calls and 1,465 puts traded on ZSL today. March 10, 11 and 12 calls were the most actives. Some traders might be buying short-term upside calls in anticipation of further weakness in silver. It is important to note that leveraged ETFs are designed to achieve their investment objective on a daily basis are not designed to track the underlying index or benchmark over a longer period of time. Inverse and leveraged ETFs that are reset daily are unsuitable for investors who plan to hold these products for longer than one trading session. Over longer periods of time, leveraged and inverse ETF performance can differ significantly from their daily objective due to the effects of compounding.

Large blocks of puts traded on some of the sector exchange-traded funds again Tuesday. Buying of June put options on SPDR Industrials ETF (XLI) and SPDR Basic Materials Fund (XLB) was highlighted in yesterday’s midday report. Similar activity surfaced in April puts on some of the ETFs Tuesday morning. SPDR Metals and Mining ETF (XME) sank $1.60 to $48.36 and 31,300 April 43 puts were bought on the ETF for $1.05 apiece. SPDR Oil and Production ETF (XOP) slipped $1.20 to $57.04 and 36,000 April 50 puts traded on the ETF for 81 cents per contract. SPDR Basic Materials (XLB) gave up 75 cents to $35.94 and 30,850 April 35 puts traded for 92 cents each.

Unusual Volume
Oncothyreon (NASDAQ:ONTY) options volume is running 6X the (22-day) average, with 100,000 contracts traded and call activity accounting for 65 percent of the volume.

SPDR Basic Materials (XLB) options volume is 2.5X the daily average, with 73,000 contracts traded and put volume representing 87 percent of the activity.

MGIC (NYSE:MTG) options volume is running 4.5X the average daily, with 56,000 contracts traded and call volume representing 99 percent of the total volume.

Increasing options activity is also being seen in Cemex (NYSE:CX), Carnival Cruise (NYSE:CCL), and SPDR Oil and Production ETF (XOP).

Implied Volatility Mover
CBOE Volatility Index (.VIX) is making a decisive move higher Tuesday. VIX, which tracks the expected or implied volatility priced into S&P 500 Index options, is up 2.65 to 20.70 amid defensive trading in the options market today. 306,000 puts and 205,000 calls traded on the S&P today, which is down 21.44 points to 1,242.89 and on pace to suffer its biggest loss so far for 2012. Meanwhile, 164,000 calls and 113,000 puts traded on the volatility index itself. March and May 32.5 puts are the most actives, as some investors might be covering bearish positions in VIX on concerns the index might see another spike in the days ahead.

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