Hot Option Plays: Support Reigns

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Cusick’s Corner
The afternoon continued to be very strong. I am watching the initial earnings reports after the close: IBM misses on rev down in after hours, YHOO up on nice beat, and CSX beats which is a surprise for the railroad. Right now we are seeing most indices and stocks hold midterm support, and plus with the sentiment of the retail trading group tipping (I will point out the rising P/C ratios) to the highest levels of negative sentiment in a while, bulls could be sleeping a little easier tonight. See you Midday.

Stock market averages rose on a busy day for corporate earnings. Coca Cola (NYSE:KO), Valero (NYSE:VLO), and US Bancorp (NYSE:USB) were among the names moving higher on profit news, while Intel (NASDAQ:INTC), IBM and Yahoo (NASDAQ:YHOO) are among the company’s reporting after the closing bell today. On the economic front, a report released before opening bell showing Housing Starts falling to annual rate of 654K last month, from 694K in February and well below expectations of 700K. However, Building Starts, which offer a better gauge of future activity, rose to 747K, from 715K and better than the 700K that was expected. Separate data on Industrial Production was unchanged in March and below expectations of +.2 percent. However, European stock market averages scored solid gains, including 2.7 percent advances in both France’s CAC 40 and Germany’s DAX, on diminishing fears about the European debt crisis. Crude oil jumped $1.30 to $104.70 per barrel and gold edged up $1.5 to $1651 an ounce. On Wall Street, the Dow Jones Industrial Average was up 200 points at midday and the gains held into afternoon trading. At the closing bell, the Dow was up 195 points and the NASDAQ gained 54.4.

Bullish
Walmart (NYSE:WMT) rose 2.1 percent to $61.87 and was among 30 Dow stocks to score gains Tuesday. None of the components of the industrial average moved lower today. Trading in Walmart was active after 10.6 million shares of the world’s largest retailer changed hands today. Typical volume is about 8 million. At the same time, 34,000 calls and 6,400 puts traded on the stock. May 62.5, which are 1 percent out-of-the-money and expiring in 31 days, were the most actives. 13,900 contracts traded on the day. The largest options trade in WMT was an April 60 – May 62.5 call spread at $1.13, 2000X. That is, the investor sold 2,000 April 60 calls on the stock at $1.78 and bought 2,000 May 62.5 calls for 65 cents. The spread was probably a roll ahead of the expiration later this week. That is, they were selling to probably close a position in the April 60s, which are now $1.87 in-the-money, and opening a new bullish position in out-of-the-money 62.5 calls. The activity seems to express the view that WMT might move beyond $62.5 in the weeks ahead.

Bullish trading was also seen in Cabot Oil and Gas (NYSE:COG), Goodyear Tire (NYSE:GT), and Teradyne (NYSE:TER)

Bearish
Shutterfly (NASDAQ:SFLY), a Redwood City, CA Internet company, added $1.03 to $30.19 and options volume was 3X the daily average. 4,175 puts and 275 calls traded on the stock. 90 percent of the volume was due to one spread trade, in which the investor apparently bought 2,000 May 30 puts for $2.45 and sold 2,000 May 25 puts at 70 cents per contract. The spread, for a $1.75 net debit, appears to be a new position in SFLY and is perhaps designed to help hedge recent gains in the stock. SFLY is up 33 percent year-to-date and the spread will offer its best payoff if the stock falls to $25 through the May expiration, or 17 percent loss over the next 31 days.

Bearish trading was also seen in SLM, Netgear (NASDAQ:NTGR), and Sysco (NYSE:SYY).

Index Trading
It was a busy day in the CBOE Volatility Index (.VIX) trading pit due to the expiration. April options on the index expire tomorrow and the last day to trade was today. 421,000 calls and 243,000 puts traded on the index. VIX, which took another stab at the 20 “psyche” level Monday, lost 1.09 to 18.46 and the most active VIX contracts included the April 18 put, which traded 77,700 contracts, and the April 20 calls, where more than 38,000 changed hands. Some players might have been selling these contracts on the view that VIX might settle between 18 and 20, and therefore the $18 puts and $20 calls will expire worthless. The settlement value will be computed tomorrow morning and it appears that it might be much higher than the 14.55 print seen at the March expiration.

ETF Action
The largest options trade (by number of contracts traded) on Tuesday was in the SPDR Financial Fund (XLF). Shares added 20 cents to $15.44 and a 70,000-contract block of June 17 calls traded on the exchange-traded fund at 8 cents per contract when the market was 8 to 9 cents. Open interest is 234,234 contracts and so the massive block of calls might be a closing trade. That is, the investor had opened a position in anticipation for a move beyond $17 per share through the June expiration, but after the 2.3 percent month-to-date decline in the fund so far in April, they are liquidating the position on diminishing hopes for such a move. XLF, which is an exchange-traded fund that holds all of the financial names from the S&P 500, is up 18.8 percent year-to-date. Still, $17 calls on the fund are 10.1 percent out-of-the-money. June options expire in 59 days.

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