Hot Option Plays: “The Trend Is Your Friend”

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Cusick’s Corner 04-27-2012
The Bulls continue to hold ground and as I have written in the past, the trend is what dictates the trade, regardless of what your indicators are telling you. Long- and medium-term support is firmly in position and until this is broken, it looks like breaks are being bought. In the short-term I have been watching the action in the Aussie Dollar, FXA, which has been strong today and this a positive catalyst for the Commodity markets in the short-term. See you After Hours.

Stock market averages are holding modest gains on a relatively quiet morning of trading Friday. The economy was in focus early after a report on GDP showed economic growth at a 2.2 percent annualized rate in the first quarter. Economists were looking for an increase of 2.5 percent. However, the University of Michigan Consumer Sentiment Index, released later, was up to 76.4 in late-April, from 75.7 mid-month and better than the 75.7 that was expected. Investors are also digesting a hefty dose of earnings news. While Amazon.com (NASDAQ:AMZN) and Expedia (NASDAQ:EXPE) shares are rallying around their results, Goodyear (NYSE:GT), Decker Outdoor (NASDAQ:DECK), and Starbucks (NASDAQ:SBUX) are among the names seeing post-earnings weakness. Trading was relatively uneventful across the Eurozone and, while crude slipped 33 cents to $104.22 per barrel, gold gained $5.5 to $1666 an ounce. The Dow Jones Industrial Average has traded in a narrow 52-point range and is up 32 points. The NASDAQ gained 15. CBOE Volatility Index (.VIX) is up .11 to 16.35. Overall options volume is light, with approximately 3 million calls and 3 million puts traded across all the exchanges through 11:40pm ET.

Bullish Flow
Goldcorp (NYSE:GG) adds 12 cents to $38.83 on a day of gains across most of the mining sector after gold edged up $3.5 to $1664 an ounce and silver ticked 5 cents higher to $31.26. Meanwhile, options volume on Goldcorp is running 2.5X the daily average after a substantial three-way spread trades on the Vancouver-based miner. In this strategy, 7,400 October 36 puts were sold on the stock at $2.30, 7,400 October 40 calls bought for $3.10, and 7,400 October 48 calls sold at 85 cents per contract. In other words, October 36 puts were sold at $2.30 to buy October 40 – 48 call spreads for $2.25. A nickel credit was collected on the three-way and the strategist is a likely buyer of the stock for $36 (and is writing $36 puts), but also wants exposure if the stock rallies and is buying an upside call spread. If the stock holds between $36 and $40 and the position is held through the expiration, all three contracts expire worthless and the strategist keeps the credit. There’s risk to the downside because, if shares fall, the puts will be assigned and the call spread expires worthless.

TripAdvisor (TRIP) is seeing relative strength and high call volume Friday. Shares of the Newton, MA online travel company are up $3.25 to $37.63 in active trading of 3.8 million shares after peer Expedia rallied around upbeat earnings news. TRIP, which will report next week (5/1), is moving higher and options action includes 5,850 calls and 700 puts, which is 3.5X the daily average. June 40 calls, which are 6.4 percent out-of-the-money and expiring in 7 weeks, are the most actives. 1,800 traded. May 40, June 35 and Dec 50 calls are busy as well.

Bearish Flow
Ford (NYSE:F) shares ticked higher in early trading, but are now down 18 cents to $11.69 after the automaker reported a 36-cent quarterly profit, which was 3 cents better than Street estimates, but at $30.5 billion, revenues were short of expectations (of $3.5 billion). The stock is modestly lower and the top options trade on Ford today is a 20,000-contract block of May 12 calls traded on the 21-cent bid. An investor possibly sold the position to liquidate a bullish play on the view a move beyond $12 (+2.7%) through the May expiration (21 days) is becoming less likely after today’s earnings release. Looking forward, monthly auto sales will come into focus next week.

Dunkin Brands (DNKN), which notched a new 52-week high yesterday on earnings news, is up another 17 cents to $32.71. Options volume on the stock is 3X the daily average, being driven by June 30 put buyers. 7,450 contracts traded and data from one exchange is indicating closing customer buyers. Open interest in the contract is 14,600 and the largest position in DNKN. Today’s put buyers are possibly expecting the stock, which is up more than 30 percent year-to-date, to pullback in the weeks ahead. Consequently, they are exiting short put positions in DNKN Friday.

Unusual Volume
Amazon.com (NASDAQ:AMZN) options volume is running 2.5X the (22-day) average, with 249,000 contracts traded and call volume accounting for 74 percent of the volume.

Starbuck’s (NASDAQ:SBUX) options volume is 8X the average daily, with 70,000 contracts traded and call volume representing for 54 percent of the activity.

Deckers Outdoor Products (NASDAQ:DECK) options volume is running 8X the average daily, with 43,000 contracts traded and call volume accounting for 50 percent of the activity.

Increasing options activity is also being seen in Expedia (NASDAQ:EXPE), Intermune (NASDAQ:ITMN), and P&G (NYSE:PG).

Implied Volatility Mover
Implied volatility in the options on Allscripts (NASDAQ:MDRX) moved up sharply Friday morning. Shares are off $6.39 to $9.62 on extremely heavy volume of 58 million shares after the company lowered guidance, announced that some Board members are stepping down, and a resignation of a CFO. The news sent shares down and 41,000 contracts traded on the stock. Typical volume is about 560 contracts through midday. Meanwhile, levels of implied volatility jumped 80 percent to 75.

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