Hot Option Plays: VIX Up, SPX Able To Hold1340

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Cusick’s Corner
Yes, this was the worst trading day of 2012 but we need to keep this in perspective. We have had an 8 week run to the upside, good domestic data, and one of the mildest winters in a long time (it’s over 60 in Chicago today). Also the yields in the bonds pulled back, 10yr below 2%, a slight positive for the bulls in equities and the S&Ps were able to hold 1340. I expect a whippy consolidation at these levels, with all eyes on Crude inventories and Apple’s (NASDAQ:AAPL) highly anticipated Ipad3 launch.

Stock market averages suffered steep losses amid increasing volatility in global equity markets Tuesday. Hong Kong’s Hang Seng lost 2.2 percent overnight and 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. France’s CAC 40 and Germany’s DAX both lost more than 3 percent due partly to 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. The decline overseas set the table for morning weakness on Wall Street and, after trading lower trough midday, market averages remained under water during the second half of trading. Uncertainty about the Super Tuesday Republican race, tensions with Iran and Friday’s jobs data are possibly weighing on investor sentiment as well. At the end of the day, the Dow Jones Industrial Average was down 204 points and suffered its biggest loss so far in 2012. The NASDAQ gave up 40 points.

Bullish
Texas Instruments (NYSE:TXN) lost 7 cents to $32.12 and call volume outpaced put volume on the chipmaker by a ratio of nearly ten-to-one. 21,000 calls and 2,250 puts traded on TI today. The top trades surfaced in afternoon action after one investor bought 4,000 April 31 calls on TXN for $1.79 and sold 4,000 April 34 calls at 38 cents. The April 31 – 34 call spread, for a $1.41 net debit, is a bullish play that offers its best payoff if shares rally to $34 or beyond through the April expiration, which represents a 5.9 percent gain over the next 45 days. Bullish trading in TXN today is noteworthy because it comes ahead of the company’s mid-quarter update, due out Thursday afternoon.

Bullish trading was also seen in James River Coal (NASDAQ:JRCC), Boston Scientific (NYSE:BSX), and Tyson Foods (NYSE:TSN).

Bearish
Arcos Dorados Holdings (ARCO), Latin America’s largest restaurant chain and biggest McDonald’s franchisee, traded down 55 cents to $18.65 today on heavy turnover of 5.1 million shares and has tumbled 10.2 percent since earnings were reported Monday morning. The stock is well off the highs of $29.40 seen in September 2011. Meanwhile, some players in the options market may be bracing for additional losses in ARCO shares. 4,600 puts and 575 calls traded on the stock today. August 17.5 puts, which are 6.2 percent out-of-the-money, were the most actives. 3,089 traded and 98 percent of the volume traded at the offer, suggesting buying interest. April and May 17.5 puts saw interest as well and implied volatility in ARCO options rose nearly 5 percent to 47.

Bearish trading was also seen in Synta Pharmaceuticals (NASDAQ:SNTA), Celldex Therapeutics (CLDX), and ViroPharma (NASDAQ:VPHM).

Index Trading
Volume picked up in the options market Tuesday. For example, 627,000 calls and 818,000 puts traded on the S&P 500 Index (.SPX), the S&P 100 Index (.OEX) and other cash index products, according to Trade Alert data. The S&P 500 traded in a 23-point range and lost 20.97 points to 1,343.36. Meanwhile, CBOE Volatility Index (.VIX), which tracks the expected or implied volatility priced into S&P 500 Index options, was up 2.92 to 20.87. Taken together, higher volumes in the index market and a rising VIX are often signs that investors are becoming more defensive and taking out protective positions with index puts. Importantly, however, the uptick in VIX has been modest so far. The index is still well below the levels seen in early-October when the indicator rallied to more than 45.

ETF Action
Trading was very busy in the world of exchange-traded funds as well. 1.4 billion shares traded on the SPDR 500 Trust (SPY), SPDR Financials (XLF) and other ETFs. Typical daily volume so far in 2012 has been less than a billion. Meanwhile, 4.7 million puts and 3.5 million calls traded across all products, which is about 50 percent more than normal. Players scrambled to buy downside puts on some of the exchange-traded fund products to hedge stock portfolios. SPY March 134 puts, March 135 puts, Weekly 134 puts and March 130 puts were the most actively ETF contracts. SPY, which is the popular ETF that holds all of the S&P 500 stocks, lost $2 to $134.75.

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