Hot Option Plays: Watching Mid Caps

OptionsXpress
updated | Author's Website

Cusick’s Corner 04-20-2012
The last trading day for April options opened to the upside but the market has not done much since that initial burst. Now that’s positive — but the Mid and Small Caps, MDY/IWM respectively, have been chopping in a consolidation, lagging their larger cap compadres. Volume has not been overly strong but if there is a break, 127 on the MDY, 79.50 on IWM, and volume does pick up through those levels, then I would flag potential strength to the shorts. At this stage this is potentially nothing more than a consolidation in a larger uptrend but I want to keep an eye on this action. Got to run, have some expiration work to do. See you After Hours.

Stock market averages are holding gains with help from earnings reports on expiration Friday. With no economic releases scheduled until Consumer Confidence numbers Tuesday, the focus is on earnings. Microsoft (NASDAQ:MSFT) is up more than 5 percent and the big winner in the Dow Jones Industrial Average on the heels of its latest profit report. GE, McDonald’s (NYSE:MCD), and Capital One (ONE) are also higher on earnings news. Sandisk (NASDAQ:SNDK), Riverbed Technologies (NASDAQ:RVBD), and Tempur Pedic (NYSE:TPX) are among the names seeing post-earnings weakness. Meanwhile, things have quieted a bit across European markets ahead of the weekend. Spain’s IBEX bounced back from three-year lows and is up 1.2 percent. Crude oil has added $1.55 to $104.27 per barrel and gold is up $1.5 to $1,643 an ounce. Stocks are broadly higher on Wall Street as well. The Dow Jones Industrial Average gained 113 points and the tech-heavy NASDAQ gained 21.4. CBOE Volatility Index (.VIX) is down 1.36 to 17. Overall options volume is active because its expiration Friday, with 4.8 million calls and 3.9 million puts traded across all the exchanges through 12:00pm ET.

Bullish Flow
Microsoft (NASDAQ:MSFT) is seeing a flurry of options activity, as shares of the software giant lead both the Dow and NASDAQ to higher ground Friday. MSFT is up $1.73 to $32.74 on high volume of 59 million shares after the company reported a quarterly profit of 60 cents per share, which was 2 cents better than Street views. Revenues also topped expectations. Shares are up on the results and options volume is running 3X the daily average, with 269,000 calls and 81,000 puts traded on Microsoft today – a ratio of more than three-to-one. April 32 calls, which are now in-the-money, are the most actives. 37,900 traded. April 33 calls are the second most actives. 30,250 changed hands. Many investors are likely closing out positions in these call options ahead of the expiration. The last day to trade April options is today.

Sequenom (NASDAQ:SQNM) is up 35 cents to $5.03 and has now surged more than 40 percent off of the 52-week lows set less than two weeks ago. Share volume is more than 4 million and about 4X the expected volume for the biotech. Options action is picking up as well. 4,500 calls and 410 puts traded on the stock, a ratio of more than ten-to-one. June 6 calls, which are almost 20 percent out-of-the-money and expiring in 8 weeks, are the most actives. 1,600 traded. May 6 and Jan 7.5 calls on SQNM are also seeing interest, as it seems that some investors are taking positions in upside calls on SQNM and looking for the stock’s recent run higher to continue.

Bearish Flow
AT&T (NYSE:T) is trading up 35 cents to $31.09 and is one of 25 Dow stocks holding gains through midday Friday. An interesting options trade on the phone giant today is a 15,100-contract block of May 25 puts for 4 cents per contract. The block traded electronically on the International Securities Exchange and was an opening buyer, according to data from the ISE. 18,880 contracts now traded. These puts are 19.6 percent out-of-the-money and have a delta of only -.02, which equates to a roughly 98 percent probability that they will expire worthless. For whatever reason, one or more investors are taking positions in these deep OTM puts and positioning for a move lower between now and mid-May. The put buying is possibly intended to help hedge a stock position ahead of next week’s earnings report.

The largest (by number of contracts) options trade on a relatively quiet expiration Friday so far is in the SPDR Utility Fund (XLU), which is the exchange-traded fund that holds all of the utility names from the S&P 500. A 27,000-contract block of May 35 calls traded on XLU at 33 cents per contract on the International Securities Exchange [ISE] and was an opening seller, according to ISEE data. XLU has been the worst performer of the nine Sector Funds so far in 2012 and today’s call write seems to possibly reflect this seller’s expectations for limited upside through the May expiration. XLU IS up 36 cents to $35.04 today, but down 3 percent year-to-date.

Unusual Volume
Microsft (NASDAQ:MSFT) options volume is running 3X the (22-day) average, with 338,000 contracts traded and call volume accounting for 76 percent of the volume.

Sandisk (NASDAQ:SNDK) options volume is 2.5X the average daily, with 73,000 contracts traded and put volume representing for 55 percent of the activity.

Human Genome Sciences (NASDAQ:HGSI) options volume is running 4X the average daily, with 44,000 contracts traded and call volume accounting for 73 percent of the activity.

Increasing options activity is also being seen in AMD, Riverbed Technology (NASDAQ:RVBD), and Skyworks Solutions (NASDAQ:SWKS).

Implied Volatility Mover
Implied volatility in the options on Cirrus Logic (NASDAQ:CRUS) is higher for a second day. As noted in yesterday’s closing report, put options on the chipmaker were busy Thursday and levels of implied volatility in CRUS options increased by 18 percent to 58.5. The activity continues today, with another 8,320 puts and 3,130 calls traded on the stock. May 21 puts are the most actives and levels of implied volatility are up another 10.5 percent to 64.5. Some investors might be buying downside puts in CRUS to hedge the stock heading into earnings next week. Shares are down over the past two days, but up more than 40 percent year-to-date.

The optionsXpress XPOUND newsletter is provided for informational purposes only. No statement in the XPOUND newsletter should be construed as a recommendation to buy or sell a security or to provide investment advice. The content provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy and completeness. optionsXpress makes every effort to provide timely information to its recipients but cannot guarantee specific delivery times due to factors beyond our control.

Options and Futures involve risk and are not suitable for all investors. Please read “Characteristics and Risks of Standardized Options” available at http://www.optionsclearing.com/about/publications/character-risks.jsp and “Risk Disclosure Statement for Futures and Options” available at https://www.optionsxpress.com/downloads/risks_futures_options.pdf prior to applying for an account. Both disclosures are available on our website and also by calling 1.888.280.8020 or 1.312.629.5455.

© 2012 optionsXpress, Inc. All rights reserved. Member FINRA, SIPC, AMEX, NOM, CBOE, ISE, ArcaEX, PHLX and NFA.

Read the DailyMarkets.com review of OptionsXpress

You may also like: