Hot Option Plays: Quiet Expiration, Range-Bound

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Cusick’s Corner 04-20-2012
Earnings have been solid and this was an orderly and quiet options expiration. With earnings continuing to be very solid, we will turn our attention next week to the Fed and AAPL earnings. So until these events are out in the open, this market seems to be in a consolidation, 1360-1390 on S&Ps. Have a great weekend, see you next week.

Stock market averages scored gains early, but trading slowed in afternoon action and trading turned mixed on expiration Friday. With no economic releases scheduled until Consumer Confidence numbers Tuesday, the focus is on earnings. Microsoft (NASDAQ:MSFT) gained 4.6 percent and was the big winner in the Dow Jones Industrial Average on the heels of its latest profit report. GE, McDonald’s (NYSE:MCD), and Deutsche Bank (NYSE:DB) were also trading higher on earnings news. Sandisk (NASDAQ:SNDK), Riverbed Technologies (NASDAQ:RVBD), and Tempur Pedic (NYSE:TPX) were among the names seeing post-earnings weakness. Meanwhile, trading was steady across European markets ahead of the weekend. Spain’s IBEX bounced back from three-year lows and added 1.2 percent. Crude oil rose $1.30 to $104 per barrel and gold added $2 to $1,643.5 an ounce. Meanwhile, the Dow Jones Industrial Average, which was up triple digits early, pared its gains and closed up 65 points. A second day of selling in Apple (NASDAQ:AAPL) shares weighed on the NASDAQ, which slipped 7.1 points.

Bullish
Harley Davidson (NYSE:HOG) saw an impressive afternoon spike on reports of stronger-than-expected sales. According to the Benzinga news service, data from the Industry Council showed the company’s sales increasing by a better-than-expected 26 percent. The stock closed up $2.13 to finish $51.70 in very brisk trading of 4.7 million shares. Meanwhile, 13,000 calls and 3,900 puts traded on Harley Davidson, a ratio of more than three-to-one. May 55 calls, which are 6.1 percent out-of-the-money, are the most actives. 7,110 traded. May 60 and August 55 calls are busy as well. Some investors might be taking positions in upside calls on HOG and hoping the company will also have positive things to say when earnings are released on Wednesday morning.

Bullish trading was also seen in Skyworks Solutions (NASDAQ:SWKS), Sequenom (NASDAQ:SQNM), and Jones Group (NYSE:JNY).

Bearish
Progressive (NYSE:PGR), the Mayfield, OH insurance company, came under pressure today and put volume is outpacing call volume by a margin of ten-to-one after the company’s CEO sent a letter to shareholders saying profit margins might get squeezed as the costs of claims rise. PGR closed down $1.01 to finish $21.37 on very heavy turnover of more than 23 million shares. Meanwhile, more than 13,000 puts and 1,300 calls traded on the stock. Morning trades included apparently buyers of May 21 and 23 puts. Not all of the flow was bearish, however, as one investor sold a block of 5,000 August 20 puts on the stock in afternoon trading at 75 cents per contract. The investor is possibly a willing buyer of PGR for $20 per share and might be taking advantage of the higher vols to write puts. Implied volatility in PGR is up 21 percent to 25 on the day.

Bearish trading was also seen in AT&T (NYSE:T), Cirrus Logic (NASDAQ:CRUS), and Sysco (NYSE:SYY).

Index Trading
CBOE Volatility Index (.VIX) closed down .92 to finish 17.44 and has lost about 2 points, or 10 percent, on the week. VIX moved back towards 20 the week before after the S&P 500 suffered its biggest weekly loss for 2012. However, the S&P 500 Index closed up 1.61 points at 1378.53 and after a seesaw week, closed 8 points above last Friday’s levels. Meanwhile, VIX, which tracks the expected volatility priced into S&P 500 Index options, moved lower in three of five trading sessions and the decline suggests that some of the high levels of market anxiety that surfaced the week before have eased a bit in recent days. However, VIX is still above the March lows of 13.66 and some investors might be bracing for another move higher in the weeks ahead. 225,000 calls and 53,000 puts traded in the VIX pit so far today. May 30 call options were the most actives.

ETF Action
The largest options trades on Friday were in the PowerShares QQQ Fund. The Qs closed down 18 cents to $65.68 and have been weighed down lately by big losses in Apple Computer. Shares of the technology giant are down in 8 of the past 9 trading sessions and have given up about 11 percent during that time. In options action, one big player seems to be anticipating further weakness in the big cap NASDAQ stocks and bought 40,000 June 64 puts on the QQQ for $1.41 and sold 40,000 June 59 puts at 46 cents. This Jun 59 – 64 put spread, for a 95-cent debit, appears to be an opening position and one that will offer its best payout if shares of the fund fall to $59 or below through the June expiration, which represents a two-month 10.1 percent slide in the NASDAQ 100.

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