Hot Option Plays: Corner Correction

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Cusick’s Corner 04-18-2012
I need to make a correction for yesterday’s Corner where I referenced Housing Permits as Starts — there is a difference. Permits allow for the potential to start building and Starts are buildings built. The take away from the data — Starts down and Permits up. The pop in Permits could be a potential flag that the starts could be ready to potentially turn up after dropping over 8% since January. So the take away on this data is that even though Starts are low, they have been trending up and when we see that permits are trending higher than Starts, that is a positive and worth monitoring. Thanks Ron for pointing out the error. See you After Hours.

Volatility across European equity markets set the table for morning weakness on Wall Street, but with no domestic economic data to guide trading, a flood of earnings reports is driving the action as well. Spain’s IBEX lost nearly 4 percent Wednesday and paced a decline across European equity markets on reports Spanish banks are seeing a sharp rise in bad loans. In the US, the focus is also on earnings. IBM is down 2.9 percent and the biggest loser in the Dow Jones Industrial Average on the heels of its latest report. Intel (NASDAQ:INTC), CREE, and Linear Technology (NASDAQ:LLTC) are also seeing post-earnings weakness. However, Yahoo (NASDAQ:YHOO), Seagate Technology (NASDAQ:STX) and Halliburton (NYSE:HAL) are among the names seeing post-earnings gains and the morning decline has been orderly thus far. The Dow Jones Industrial Average is down just 60 points and the NASDAQ lost 12. Crude oil prices tumbled $1.72 to $102.92 on the heels of bearish weekly inventory data. Gold lost $10 to $1641 an ounce. CBOE Volatility Index (.VIX) ticked up .40 to 18.86. Overall options volume is running about the same as yesterday, with 4.8 million calls and 4 million puts traded across all the exchanges through 12:30pm ET.

Bullish Flow
Bank of America (NYSE:BAC) sees action ahead of earnings. The company is due to report tomorrow morning. The stock isn’t doing much and is up just 3 cents to $8.95 on relatively light volume of 100 million shares. By way of comparison, typical volume through midday is more than 170 million. However, call options on the bank are busy. 247,000 contracts traded, which is more than four times the numbers of puts traded. Put volume is only 59,000 contracts. One interesting trade was a block of 55,000 November 10 calls traded electronically on AMEX for 75 cents per contract. 60,230 now traded. April 9, April 10, and May 10 calls are the next most actives. Some investors might be taking positions in upside calls on BofA on hopes the earnings report might serve as a catalyst to lift the stock further in the days/weeks ahead. Shares have already rallied more than 60 percent so far in 2012.

Yahoo (NASDAQ:YHOO) shares gained 43 cents to $15.44 Wednesday on high volume of 21 million shares after the company released upbeat earnings Tuesday afternoon. Options on the stock are busy. 75,000 calls and 24,000 puts so far. The activity includes a three-way spread, in which the investor apparently sold 6,000 July 15 puts on the stock at 75 cents to buy 6,000 July 16 – 18 call spreads for 55 cents. The spread seems to reflect expectations for additional gains in YHOO through mid-July. By writing $15 puts, the investor is also stating that they are a willing buyer of the stock at that price.

Bearish Flow
Chesapeake (NYSE:CHK) is down $1.50 to $17.62 on heavy volume of 65 million shares and falling to new 52-week lows today after Reuters reported that the company’s CEO has borrowed $1.1 billion against his stake in the company’s wells. Shares of the oil and gas company are under pressure and options action is picking up as well. 114,000 calls and 159,000 puts traded on the stock so far. April and May 17 puts are the most actives. $17 puts on CHK are now 3.5 percent out-of-the-money and some investors might be opening positions on concerns about additional losses in the stock in the days ahead. April options expire at the end of this week.

Nuance (NASDAQ:NUAN), a Burlington, MA software developer, is down 45 cents to $23.39 and options volume on the stock is running 3X the daily average, with 12,000 puts and 1,050 calls traded in the name so far. The top two trades are 4,800-contract blocks of January 18 puts traded for $1.25 and $1.30 (9600 contracts total), when the market was $1.15 to $1.30. Looks like an opening put buyer. An investor might have initiated the trade to hedge stock from additional losses after a two-week 12.5 percent slide in shares. The company is due to release earnings around May 10. Shares tumbled 13 percent on Feb 10 when earnings were last reported.

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