Hot Option Plays: Tight Range, Some Bulls Holding On

OptionsXpress
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Cusick’s Corner 03-30-2012
The bid continues to drive the market and push out the shorts. While this may not be news to most of you, this dynamic was watched closely into the open. It’s the last trading day of the Quarter and while things have been relatively orderly, in the past I have seen some weird trade into the end of day, so stay on your toes. See you After Hours.

Stock market averages are holding modest gains to close the first quarter following mixed economic news. Data released before the opening bell showed Personal Spending up .8 percent as Personal Incomes rose .2 percent in February. Economists were looking for spending to increase by .6 percent and a .3 percent rise in incomes. The Chicago PMI disappointed, however, after falling to 62.2 in March, from 64 the month before. Economists were expecting the gauge of manufacturing activity to dip to 63.0. The University of Michigan reported that its Consumer Sentiment Index improved to 76.2 at the end of March, from an earlier reading of 74.3 and 2 points better than expected. Meanwhile, trading was mixed overseas. While Japan’s Nikkei and Hong Kong’s Hang Seng both lost .3 percent, France’s CAC 40 Index is up 1.3 percent and pacing an advance across the Eurozone. Crude oil prices are up 44 cents to $103.22 per barrel after two days of big losses. Gold gained $11.50 to $1663.50 an ounce. On Wall Street, the Dow Jones Industrial Average has traded in a narrow 59-point range and is up 45 points. The NASDAQ added 2 points. CBOE Volatility Index (.VIX) edged up .05 to 15.53. Overall options volume is slowing ahead of the weekend. 3.9 million calls and 3.8 million puts traded across all the exchanges through 12:30pm ET.

Bullish Flow
Rio Tinto (NYSE:RIO) shares are up 73 cents to $55.17 in active trading of 2.2 million shares and options on the British metals and mining company are busy for a second day. 25,000 calls and 3,400 puts traded on the stock yesterday. Volume today is 13,000 calls and 2,440 puts. The most active options so far today have been the May 57.5 calls which are 4.2 percent out-of-the-money and expire in 49 days. A total of 8,800 May 57.50 calls traded against 234 contracts in open interest. There have been no big trades and the largest so far has been a 478-lot that traded for $1.80 per contract when the market was $1.65 to $1.80. April 55 and 57.5 calls on RIO are busy as well. The stock is down 8.7 percent since January and some investors might view the two-month decline as an opportunity to initiate bullish trades on RIO. However, rather than buying shares outright today, they might be buying these options that give the right to buy (or call) the stock at a specific level (strike price) for a predetermined period of time (expiration date).

Boyd Gaming (NYSE:BYD) is off 6 cents to $7.97 today, but set to end the quarter with a gain of about 7 percent. Some players in the options market may be anticipating a possible move higher through the second quarter, as at-the-money calls on the stock are seeing interest Friday. A 1,689-lot of May 8 calls traded for 60 cents on the International Securities Exchange and data from the ISE is indicating an opening buyer. Several smaller lots traded for 55 cents as well. 3,148 contracts now traded against only 7 in open interest. If bought for 60 cents, an $8 call has a breakeven at expiration (excluding transaction costs) at $8.60 per share, which represents a 7.5 percent move higher if the stock is trading for $8 per share today. May equity options expire in seven weeks.

Bearish Flow
Radioshack (NYSE:RSH) is down 11 cents to $6.20 and is probing Thursday’s 52-week lows of $6.14 after a disappointing first quarter in 2012. Shares are off 35.9 percent over the past three months on concerns about the electronic retailer’s profit outlook. The stock has fallen nearly 30 percent on January 31 after the company lowered its fourth quarter earnings forecast and continued falling over the next two months. Today’s options action seems to reflect concerns about additional weakness in RSH heading into the second quarter. 6,010 puts and 880 calls traded on the stock so far. May 6 puts, which are now 20 cents out-of-the-money and expiring in seven weeks, are the most actives. 2,635 traded. Another 1,790 April 6 puts have changed hands. Levels of implied volatility have moved up 10 percent to 51, as some investors may be taking positions in the downside puts on possible concerns about a move below $6 in the weeks ahead.

An interesting three-way spread traded in the iShares Small Cap Fund (IWM) Friday morning. Shares were unchanged at $83.08 in morning trading and one strategist sold 25,000 June 89 calls on the ETF at 85 cents, bought 25,000 June 77 puts for $1.60 and sold 25,000 June 70 puts at 60 cents. In other words, Jun 89 calls were sold to help finance the purchase of Jun 70 – 77 put spreads for $1, and 15 cents was paid for the three-way. The spread has traded 40000X on the day and is likely a short-term hedge, as the best profits from the position will happen if shares of the fund fall to $70 or less through the expiration, which represents a 15.7 percent slide in the Russell 2000 Small Cap Index through mid-June.

Unusual Volume
Research In Motion (NASDAQ:RIMM) options volume is running 3.5X the (22-day) average, with 323,000 contracts traded and put volume accounting for 61 percent of the volume.

Vivus Pharmaceuticals (NASDAQ:VVUS) options volume is 2X the average daily, with 55,000 contracts traded and call volume representing for 69 percent of the activity.

Ivanhoe Mines (NYSE:IVN) options volume is running 4X the average daily, with 23,000 contracts traded and put volume accounting for 96 percent of the activity.

Increasing options activity is also being seen in Lorillard (NYSE:LO), Aetna (NYSE:AET), and Tibco Software (NASDAQ:TIBX).

Implied Volatility Mover
Research In Motion (NASDAQ:RIMM) is up and implied volatility in the options on the Blackberry-maker is down today after the company reported earnings after the closing bell yesterday. Although the stock fell in the after hour session on the results Thursday, it has since bounced back and is up 84 cents to $14.57 and new session highs on volume approaching 60 million shares. Trading in the options is very active as well, with 142,000 calls and 207,000 puts traded in RIMM. Meanwhile, levels of implied volatility have dropped 38 percent to 51 now that the event risk has passed and the stock is holding gains on the news.

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