Hot Option Plays: Scanning For Potential Setups

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Cusick’s Corner 03-15-2012
What a day — equities are at levels not seen since 2008, S&Ps at 1400. Earlier I was scanning for potential setups in names that have had nice 3-4 day runs but looked tired today, CAT and FSLR, and then I looked at sectors that have been potentially oversold over the last 4 sessions and had a bounce, most notably TLT. This latter trade has more risk to it, so keep that in mind when you recognize a potential setup. I also looked at names that are closing in on mid- and long-term support, 50 & 200 day moving averages, i.e. AMZN, GOOG, TLT, and GLD. The morning could be volatile as index options settle, SPX, NDX, etc., there may be some choppy markets as we go into the expiration of equity options, so stay on your toes. See you Midday.

Stock market averages finished with gains with help from economic data Thursday. A report released before market hours showed Weekly Jobless Claims falling by 14,000 in the period ended March 10. Economists were looking for a smaller decline of 10,000. Separately, the Labor Department also reported that the Producer Price Index [PPI] was up .4 percent in February, which was .1 percent less than expected. A third report released later showed the Philadelphia Fed Survey of manufacturing activity at 12.5 in March, which was up from 10.2 last month and in-line with estimates. Stock market averages ticked higher on the data and are holding gains through midday. Trading slowed into the afternoon session, but market averages strengthened again in the final hour. 22 Dow stocks moved higher and the industrial average posted its seventh consecutive gain. At the closing bell, the Dow was up 59 points and at session highs. The tech-heavy NASDAQ gained 15.6 points.

Bullish
Options on Bank of America (NYSE:BAC) were heavily traded Thursday. Shares gained 4.5 percent to $9.24 and again led the Dow Jones Industrial Average to higher ground. BAC has now rallied 15.5 percent in just three days. A flurry of activity accompanied today’s move. 483 million Bank of America shares traded on the session. Typical volume is 270 million. Meanwhile, options volume rose to 2.5X the daily average. Approximately 800,000 calls and 215,000 puts traded in BofA options today. Mar 9 calls, which are now 24-cents in-the-money heading into tomorrow’s expiration, were the most actives. More than 150,000 contracts traded, as some players were likely closing out positions before the contract expires. April 9 calls were very heavily traded as well. 108,000 changed hands. Some investors might have been rolling as the stock moved higher. That is, they were potentially exiting positions in March, but maintaining bullish exposure in the bank by possibly buying new positions in April call options on BofA.

Bullish trading was also seen in Sealed Air (NYSE:SEE), Akamai (NASDAQ:AKAM), and Supervalu (NYSE:SVU).

Bearish
Conoco Phillips (NYSE:COP) didn’t participate in the day’s gains on Wall Street. Shares of the oil company shed 88 cents to $76.63 and trading in the options on the stock was lopsided, after 62,000 puts and 9,910 calls traded in the name today. Much of the high put volume was due to one spread trade, after a strategist bought 20,500 August 70 puts on the stock for $2.15 and sold 20,500 August 60 puts at 65 cents. This large spread, for a $1.50 net debit, appears to be a new position and one that offers its max payoff if shares fall to $60 or less through mid-August, which represents a 21.7 percent drop over the next five months. Shares have advanced 25.6 percent off early-October lows, and a shareholder might have initiated the spread to help hedge the stock in the months ahead.

Bearish trading was also seen in Ctrip (NASDAQ:CTRP), Synovus (NYSE:SNV), and ChinaCast (NASDAQ:CAST).

Index Trading
It was a brisk day in the index market due to the expiration. Since the settlement values for many index products are computed using Friday morning opening prints, the last day to trade options on many indices before they expire is on the Thursday before the expiration. Today was the last day to trade many March index contracts before tomorrow’s Quadruple Witch expiration. 755,000 calls and 698,000 puts traded across the S&P 500 Index (SPX), S&P 100 Index (.OEX), and other cash indexes. The S&P 500 Index gained 8.32 points to 1,402.60 and recaptured the 1,400 level for the first time in since June 2008. Meanwhile, the most actively traded index options on the day were the March 1,350 puts and calls on the S&P 500, as some players were likely closing out positions before the contracts expire.

ETF Action
SPDR Technology Fund (XLK) rose 8 cents to $29.99 and to its best levels in over a decade Thursday. Trading in the options on the ETF was very heavy. 166,000 calls and 66,000 puts traded in the product. While much of the call activity was related to ex-dividend activity in XLK, the top trades of the day were in the puts. In morning trading, one investor bought 20,000 August 30 puts on the ETF for 67 cents and sold 40,000 August 27 puts at 10 cents. The large 1X2, for a 47 cent debit, appears to be a new position and might have been initiated to hedge a portfolio of technology names. The ratio makes its best potential profits if XLK falls to $27, or a loss of 10 percent, through mid-April. The debit is at risk if XLK moves above $30 and the position is held to expiration. There is additional risk to the downside in put ratio spreads because only half of the lower strike puts that were sold are hedged by the higher strike puts, which are bought.

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