Hot Option Plays: NASDAQ Under Pressure

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Cusick’s Corner 04-19-2012
This was a tough day for the markets. As I noted in the Midday, a break in the NASDAQ below 3015 could trigger some red flags in the short term, and it has. The volume for the Tech sector was high and that was the theme through all the major indices today. At this stage, the markets are straddling short term trend support and with no economic data coming out tomorrow, expiration will be the main catalyst early. What was most notable today — volatility in a lot of expiring options did not come out really at all, leading us into tomorrow’s session which is potentially gearing up to be both an interesting open and morning session. See you Midday and manage your expiration risk.

Stock market averages fell on a heavy news day. On the economic front, a report released early showed Jobless Claims declining by 2,000 to 386K last week. Economists were expecting to see a decline larger decline to 375K from 388K. Later, a report on Existing Home Sales was down to an annual rate of 4.48 million, which was a decline from 4.6 million in February and below expectations of 4.62 million. The Philadelphia Fed Survey fell to only 8.5 in April, from 12.5 in March and worse than the 10.3 that was expected. The only bright spot was the List of Leading Indicators for March, which was up .3 percent and .1 percent more than expected. Earnings are also in focus. Travelers (NYSE:TRV) and Verizon (NYSE:VZ) were the two of only three winners in the Dow Jones Industrial Average after profits topped expectations. BofA (NYSE:BAC) erased early gains and finished down 1.7 percent. American Express (NYSE:AXP), Qualcomm (NASDAQ:QCOM), and EMC also slipped on earnings news Thursday. The Dow Jones Industrial Average was only modestly lower at midday, but the selling picked up in afternoon action. Sharp losses across Eurozone equity markets and the options expiration exacerbated volatility a bit. At the bell, the Dow was down 69 points. A 3 percent loss in Apple (NASDAQ:AAPL) weighed on the NASDAQ, which lost 23.9 points.

Bullish
Blackstone Group (NYSE:BX) lost 70 cents to $14.14 in active trading of 5.7 million shares after the New York-based asset manager posted disappointing quarterly earnings numbers Thursday. Options on the stock were busy as well. 59,000 calls and 4,300 puts traded in the name, which is 14X the daily average. Much of the call activity was due to one spread trade, in which the investor apparently sold 21,000 January 15 calls on BX at $1.14 per contract and bought 29,700 January 2014 $20 calls for 84 cents per contract. This diagonal ratio spread might roll a bullish position out one year and up 5 strike prices. It seems to express the view that the stock is likely to remain below $15 through January 2013, but then perhaps climb to more than $20 by January 2014. The stock has had a rough stretch in recent weeks and is now down 10.6 percent since January. A 52-week high of $19.49 per share dates back to April of last year.

Bullish trading was also seen in Sysco (NYSE:SYY), Riverbed Technology (NASDAQ:RVBD), and Pandora (P).

Bearish
Cirrus Logic (NASDAQ:CRUS) shares moved down 89 cents to $22.96 in active trading of 2.3 million shares and implied volatility in the options on the chipmaker moved higher on increasing put volume Thursday. 7,735 puts and 1,400 calls traded in Cirrus options today. The activity was in smaller sizes. The top trade was a 568-lot of May 24 puts traded on the $1.70 asking price. 2,720 CRUS March 24 puts changed hands total. May 21 and 22 puts were busy as well and levels of implied volatility in the options stock rose 18 percent to 58.5. The stock performed well during the first few months of the year and is up 45 percent year-to-date. The apparent put buying might be designed to help hedge recent profits in the stock ahead of the company’s April 25 earnings release.

Bearish trading was also seen in Apollo (NASDAQ:APOL), Career Education (NASDAQ:CECO), and Level 3 (NASDAQ:LVLT).

Index Trading
It was a busy day in the S&P 500 Index (.SPX) pit on the Chicago Board Options Exchange. Today was the last day to trade April options on the index before a settlement value is computed tomorrow morning. The index lost 8.22 points to 1,376.92 and volume in SPX options was 660,000 puts/389,000 calls. April 1,400 puts and calls were the day’s most active index contracts. The index spent a lot of time in March and early-April bouncing around the 1,400 level and there is substantial open interest in 1400 puts and calls on the index. Investors were likely selling to close positions in the April 1400s before the contracts expire. Consequently, CBOE Volatility Index (.VIX), which tracks the expected volatility priced into S&P 500 Index options, edged down .28 to 18.36. VIX typically moves higher when the S&P 500 moves lower, but not today. The volatility index was perhaps being influenced by the heavy selling of SPX premium due to expiration.

ETF Action
Trading was heavy in the SPDR 500 Trust (SPY) Thursday as well. While SPX is a cash-settled index that holds five hundred large publicly-traded companies, SPY is an exchange-traded fund that holds the same 500 names. Unlike SPX, which is simply an index or barometer, SPY can be bought and sold throughout the trading day like shares of stock. Volume in the SPY, or so-called “SPYder”, today approached 200 million shares. Meanwhile, 2 million puts and 1 million calls traded in the product. Of the 3 million contracts traded, about 1.75 million, or 58.3 percent, were front-month April options, which expire after tomorrow. Shares lost 89 cents to $137.72 and the April 136, 137, and 138 puts were the most actives.

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