Hot Option Plays: Watch The Consumer

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Cusick’s Corner 04-23-2012
I did very little today — the data, political unrest in both the EU and China, and the inability of any sector to do nothing more than grind up only to get beaten down, left me very little desire to be active. I will be watching Consumer Confidence in the morning, any miss could impact the Discretionary sector, XLY, which could weigh on the market early. See you Midday.

Fears about the European debt crisis seemed to weigh on stock market averages Monday. With no domestic economic news to guide the morning trading, steep losses across Eurozone equity markets set the table for weakness on Wall Street. A 3.4 percent slide in Germany’s DAX helped pace the decline on uncertainty about French elections and amid rising bond yields in Spain and Italy. In the US, the focus is also on earnings. Conoco Phillips (NYSE:COP), Checkpoint (NASDAQ:CHKP), and Xerox (NYSE:XRX) were among the names to report after the weekend ahead of a flood of reports are scheduled throughout the remainder week – including results from Apple Computer (NASDAQ:AAPL) Tuesday afternoon. Netflix (NASDAQ:NFLX), Texas Instruments (NYSE:TXN), and Big Lots (NYSE:BIG) are among the company’s reporting after the close Monday. However, concerns about Europe seemed to be the primarily catalyst for the increased market volatility to start the trading week. The euro lost .5 percent to 1.315 against the buck and crude oil gave up 80 cents to $103.08 per barrel. The Dow Jones Industrial Average closed down 102 points and the NASDAQ lost 30.

Bullish
Walmart (NYSE:WMT) tumbled 4.7 percent to $59.54 on heavy volume of 37.5 million shares and was the biggest loser in the Dow Jones Industrial Average Monday amid allegations the company engaged in bribery in Mexico for years and then covered up the scandal. If the allegations are true, it could potentially tarnish the image of the world’s largest retailer. Shares tumbled on the reports and options volume was brisk, as 73,000 calls and 46,000 puts traded in Walmart. The top trades were blocks of January 2013 and January 2014 $40 calls, which are almost $20 in-the-money. Some investors might have been liquidating winning positions in longer-term ITM calls on the news. However, not all of the flow was bearish. May 60 calls, which are .8 percent out-of-the-money and expiring in 25 days, were the most actives. 14,500 traded. May 62.5 and Weekly 60 calls were the next most actives, as some investors might have been taking positions in short-term upside calls on the view that today’s sell-off in WMT was potentially overdone.

Bullish trading was also seen in TIVO, STEC, and ATP Oil and Gas (NASDAQ:ATPG).

Bearish
ARM Holdings (NASDAQ:ARMH) is potentially a name worth watching Tuesday morning. The company will release earnings and a large spread traded in the British semiconductor company ahead of the news. Shares lost 28 cents to $27.58 and lost 4.9 percent over three days. In options action, one investor sold 8,150 June 31 calls on the stock at 25 cents per contract to buy a Jun 24 – 27 put spreads for $1. The three-way, for a 75-cent debit, traded multiple times on the day and appears to be new positioning in ARMH. If so, the spread seems to express a bearish view on the stock, as the position offers its best payoff if the stock falls to $24 or less through the expiration, which represents a 13 percent drop over the next 53 days.

Bearish trading was also seen in Sanmina (NASDAQ:SANM), Emulex (NYSE:ELX), and Sysco (NYSE:SYY).

Index Trading
CBOE Volatility Index (.VIX) recaptured the 20 “psyche” level, but then closed near session lows Monday. Still, the market’s “fear gauge” gained 1.53 to 18.97 after the S&P 500 lost 11.59 points to 1,366.94. Interestingly, volume in the VIX pit was very light today despite the volatility in the index. Only 129,000 calls and 62,000 puts traded on the volatility index, which is 40 percent the recent daily average for the product, according Trade Alert data. May 25 calls were the most actives. 18,878 contracts changed hands. July and May 15 puts were the next most actives.

ETF Action
Put volume picked up in the SPDR Basic Materials Fund (XLB) Monday morning. XLB lost 45 cents to $36.03 on volume of 10.3 million shares. Meanwhile, 47,000 puts and 11,000 calls traded on the ETF today. June 34 puts, which are 5.6 percent out-of-the-money and expiring in 53 days, saw most of the flow. The activity included a morning buyer of 11,050 contracts for 76 cents per contract and then, a bit later, another 10,560 were bought for 87 cents. Total volume in XLB Jun 34 puts today was 39,292 contracts. XLB is one of nine Select Sector Exchange Traded Funds that collectively hold the 500 stocks from the S&P 500. XLB holds all of the chemical, metal and other material-related companies. Some investors might have been possibly buying downside puts on the fund to hedge the risk of further losses in the sector through mid-June.

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