Hot Option Plays: Fed Speaks

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Cusick’s Corner 04-25-2012
The FOMC was a non event and the forecasts were hawkish, higher rates and inflation can be expected. Big Ben kept the quiver of easing on the ready, just in case EU or Employment tips. This was a win all-around for the bulls and after the upside move in the morning, the indices were mostly range bound. Now with the Fed and AAPL out of the way, the Data really ramps up — Claims tomorrow and then we swing into some big earnings names which could add some volatility early. See you Midday.

Stock market averages finished higher with help from earnings Wednesday. Boeing (NYSE:BA) shares jumped 5.3 percent and led the Dow Jones Industrial Average after the company’s earnings topped forecasts. Apple Computer (NASDAQ:AAPL) shares rallied $49.72 to $610 and helped the NASDAQ after the company’s earnings blew past Street estimates. On the economic front, a report on Durable Goods released early Wednesday was down to -4.2 percent in March and well below economist estimates of -1.7 percent. Attention later shifted to the Federal Reserve’s monetary policy meeting. The Fed concluded the meeting and issued a statement that seemed a bit more hawkish than in March. Officials noted moderate economic growth and modest signs of inflation. The talk seemed to dash some hopes for another round of Quantitative Easing [QE3]. But, while bonds and gold slipped a bit, the Dow held steady and finished the day up 89 points. The tech-heavy NASDAQ surged 68 points.

Bullish
Watson Pharmaceuticals (NYSE:WPI) was up $1.09 to $69.69 in active trading of 2.95 million shares Wednesday. Options volume on the generic drug-maker was 2X the daily average. 16,000 calls and 1,900 puts traded on the stock today. May 80 calls, which are 14.8 percent out-of-the-money and expiring in 23 days, were the most actives. 10,275 traded. May 70 and 75 calls were busy as well and levels of implied volatility in options on WPI were up 9 percent to 40.5, as some upside call buyers were apparently taking positions on hopes for short-term strength in the stock. The timing seems very good so far. WPI is up $73.20 in extended hours trading Wednesday on news it is buying Swiss-based Actavis. The deal is expected to be 30 percent accretive to the company’s 2013 Earnings Per Share.

Bullish trading was also seen in Corning (NYSE:GLW), Fairchild Semiconductor (NYSE:FCS), and Eastman Chemical (NYSE:EMN).

Bearish
Gap Stores (NYSE:GPS) moved to new 52-week highs today and was up 70 cents to $27.89. One or more investors are possibly looking to hedge recent gains in the stock as May 24 – 26 put spreads on the retailer were busy today. One player bought the spread for 32 cents, 8500X (bought 8,500 May 26 puts for 42 cents per contract and sold the 24s for a dime). The spread traded 10000X on the day and appears to be opening activity. The bearish flow might be to hedge stock ahead of event risk – including April same store sales due next Thursday and Gaps’ earnings on 5/17.

Bearish trading was also seen in XCO Resources (NYSE:XCO), Standard Pacific (NYSE:SPF), and Total (NYSE:TOT).

Index Trading
It was another slow day in the index pits today, 431,000 calls and 515,000 puts traded on the S&P 500 Index (.SPX), CBOE Volatility Index (.VIX) and other cash indexes which is up a bit from yesterday, but only 75 percent of the recent average daily volume for the index market, according to Trade Alert data. The PHLX Bank Sector Index (.BKX) is one product that saw higher than normal volume, due to one big trade. BKX tracks the share price action of two dozen leading banks and finished the day up .50 to 48.33. In options action, a 5000-lot of June 51 calls were sold on the index at 60 cents per contract. There is no open interest in the contract and so the call write appears to be a new position – a view that BKX will not rally beyond 50 through the June expiration. An investor with positions in shares of banking names might have initiated the trade to generate a bit of income in the portfolio. If BKX moves beyond 51 through the expiration, the investor does have the obligation to pay cash equal to the difference between the settlement value of the index and the 51-strike price.

ETF Action
Options on the iShares Silver Fund (SLV) were busy today, even as trading was relatively quiet in the metals market. Gold added $2 to $1646 an ounce and silver slipped 4.5 cents to $30.70. Meanwhile, SLV, which is a fund that allows investors to take ownership of silver by buying exchange-traded shares, lost 7 cents to $29.86 on heavy volume of 25 million shares. Options volume was 2X the daily average. 117,000 calls and 141,000 puts traded on the fund Wednesday. Weekly 29 and 30 puts, which expire in just two days, were the most actives, as some investors might have been taking positions in the downside puts on SLV on concerns about additional weakness in the white metal before the weekend.

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