Hot Option Plays: Volatility Crush

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Cusick’s Corner 04-25-2012
Apple beats — stock runs up $50 (NASDAQ:AAPL), and volatility as I discussed yesterday was crushed. Volatility on AAPL weekly options was cut in half, from 80 down to 40, and May volatility dropped 19%. For sellers of premium this is a potential gift because the options they sold went down. Buyers of options who were not aware of the high volatility may have some remorse. This is an example of how much volatility can impact the premium of an option and why we need to be aware of this premium especially going into an event. The FOMC will report today, so until this announcement rolls out, sellers might be at bay and longs might wait patiently, waiting for any comment on QE3. See you after the FOMC.

Stock market averages are holding gains with help from earnings news, but the rally is being held in check by weak economic data and cautious trading ahead of the Federal Reserve’s post-meeting statement. 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. However, Boeing (NYSE:BA) shares jumped 4 percent and are the best gainers among 23 stocks moving higher within the Dow Jones Industrial Average after the company’s earnings topped forecasts. A $50 post-earnings surge in the share price of Apple Computer (NASDAQ:AAPL) is helping the NASDAQ. Now, focus turns to the FOMC’s post-meeting rate announcement. While officials are expected to hold rates steady, market participants will be searching for signs the Fed is leading towards further Quantitative Easing [QE3]. The Dow is up 69 points ahead of the news, but 35 points off session highs. The NASDAQ jumped 55 points. CBOE Volatility Index (.VIX) is down .78 to 17.32. Trading in the options market is active today, with 3.7 million calls and 3 million puts traded across all the exchanges through 11:30pm ET.

Bullish Flow
Corning (NYSE:GLW) is up 80 cents to $14.14 in active trading of 19.5 million shares after the company posted first quarter earnings that topped Street estimates. Options volume on the specialty glass-maker is running 7X the daily average. 108,000 calls and 9,000 puts traded on the stock. The top trade is an 84,000-contract block of January 17.5 calls bought for 40 cents per contract. The massive premium purchase is possibly a closing trade, as open interest in GLW Jan 17.5 calls is 105,637 and the largest position in the name. An investor was possibly short the calls as part of a covered call strategy and is buying back the call options today to close. May 14, Jun 14, and Nov 16 calls on GLW are busy today as well.

The second largest trade today behind the large block of calls on Corning is in Bank of America (NYSE:BAC). Shares are off 2 cents to $8.19 and a 50,000-contract block of May 7 puts trades on the bank at 5 cents per contract on NYSE-ARCA. An investor sold the block, according to a source at the exchange, and is possibly closing out a position. Open interest in the May 7 puts on BAC is 216,693. The contract is 14.5 percent out-of-the-money and expiring in 22 days. An investor might have sold the block on diminishing concerns about a move below $7 in BAC shares over the next few weeks.

Bearish Flow
A large put spread trades in the iShares China Fund (FXI) midday Wednesday. Shares are up 20 cents to $37.37 and 15,000 June 37 puts traded on FXI for $1.21 per contract when the bid-ask was $1.19 and $1.21. At the same time, 15,000 Jun 32 puts traded on the ETF at 18 cents per contact when the market was 18 to 20 cents. Taken together, the trade appears to be a Jun 32 – 37 put spread for a $1.03 debit. If so, it’s a bearish play on China’s equity markets. The best payoff happens if shares fall to $32 or less through the June expiration, which represents a 14.4 percent decline in FXI shares over the next seven and a half weeks.

XCO Resources (NYSE:XCO), a Dallas, TX oil and natural gas company, is off 15 cents to $6.09 and morning options trades on the stock include a buyer of 4,175 September 6 puts for $1.0 per contract. 5,691 traded against 5,101 in open interest. The contract is 9 cents out-of-the-money and some investors might be buying the contract to hedge stock ahead of the company’s May 1 earnings report.

Unusual Volume
Corning (NYSE:GLW) options volume is running 7X the (22-day) average, with 115,000 contracts traded and call volume accounting for 93 percent of the volume.

Eli Lilly (NYSE:LLY) options volume is 3.5X the average daily, with 53,000 contracts traded and call volume representing for 69 percent of the activity.

Juniper Networks (NASDAQ:JNPR) options volume is running 2.5X the average daily, with 51,000 contracts traded and call volume accounting for 81 percent of the activity.

Increasing options activity is also being seen in Xerox (NYSE:XRX), Gap Stores (NYSE:GPS), and Boeing (NYSE:BA).

Implied Volatility Mover
Boeing (NYSE:BA) is up $2.84 to $76.05 in active trading of 4.5 million shares and is the best gainer in the Dow Jones Industrial Average Wednesday after the company reported better-than-expected first quarter earnings and revenues. Shares are rallying and options on the stock are actively traded. 20,000 calls and 15,000 puts traded on Boeing so far, which is 2.5X the daily average. Meanwhile, levels of implied volatility in BA options is down 20.5 percent to 18.5 and moving back towards the 52-week lows of 16.5 set in mid-March.

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