Hot Option Plays: Watch Retail Next Week

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Cusick’s Corner 04-27-2012
This has been an interesting week with mixed data and big earnings. The strength in the Aussie Dollar got me structuring some potential ideas in Copper, JJC, and the weakness in the US Dollar has me doing some homework on a potential Gold position. At this stage the market is at an inflection point. The overall trend in the market is Bullish and may potentially outweigh the sentiment that’s coming from the average retail trader which is not Bullish as shown by the Put/Call ratio over 1. Consumer names, XLY, will be under scrutiny next week because Personal Income and Personal Spending data is due out pre-open on Monday, plus there are some big retail names reporting earnings, CMCSA, TWX, NWSA (these 3 names are close to 10% of the XLY ETF), so I am doing some research over the weekend to look for any potential ideas.

Stock market averages finished with modest gains on a day of uninspired market action 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 also digested a hefty dose of earnings news Friday. Amazon.com (NASDAQ:AMZN) and Expedia (NASDAQ:EXPE) surged on their results, but Goodyear (NYSE:GT), Ford (NYSE:F) and Starbucks (NASDAQ:SBUX) were among the names seeing post-earnings weakness. Trading was relatively uneventful across the Eurozone and in the commodities market as well. Crude edged up 18 cents to $104.73 and gold gained $3.5 to $1664 an ounce. The Dow Jones Industrial Average was up 32 points midday and finished with a 23-point gain. The NASDAQ added 18.6 points.

Bullish
Clean Energy Fuels (NASDAQ:CLNE), a Seal Beach, CA maker of alternative fuel natural gas vehicles, jumped $1.15 to $19.36 after Jim Cramer made positive comments about the company on Thursday’s installment of Mad Money. The stock moved higher Friday and options activity picked up as well. 9,235 calls and 1,150 puts traded on CLNE today, which is 2.5X the daily average. Most of the activity was in smaller sizes. The largest trade was 200 May 18 calls traded for $1.45 per contract. 4,400 CLNE May 18 calls traded on the day. May 19 and 20 calls were the next most actives and levels of implied volatility in CLNE options was up 10 percent to 59, as some players might have been taking positions and hoping for additional good news when the company reports earnings on May 7.

Bullish trading was also seen in Aeropostale (NYSE:ARO), Trip Advisor (TRIP), and GoldCorp (NYSE:GG).

Bearish
Decker Outdoor (NASDAQ:DECK) shares tumbled $17.63 to $51.83 after the company’s latest earnings report. DECK posted a 20-cent per share profit, which was five cents short of Street estimates. Revenues were in-line with expectations. The stock had heavy volume of almost 15 million shares. Meanwhile, options volume surged to 11X the daily average. 30,000 calls and 27,000 puts traded in the name. May 55 and 60 calls were the most actives, as some investors were probably selling out-of-the-money calls on the view the upside for the stock is limited after today’s volatile selloff. Downside May and June 50 puts were actively traded as well.

Bearish trading was also seen in LSI Logic (NYSE:LSI), Dunkin Brands (DNKN), and Ann Taylor (NYSE:ANN).

Index Trading
Implied volatility in the options market fell this week, but edged a bit higher during the month of April. For example, CBOE Volatility Index (.VIX) hit a morning low of 15.83 before ticking higher late in the day and closing up .08 to 16.32. Still, the market’s “fear gauge” has been down three days in a row and has lost 14 percent since Monday. The S&P 500 (.SPX) finished up 3.38 to 1,403.36 and, after a four-day run higher, is back within striking distance of the multi-year highs of 1,419.04 seen on the first trading day of the April. VIX, which tracks the expected volatility priced into S&P 500 options, is now up 5.3 percent month-to-date heading into the last trading day of the month. The volatility index is down 30.3 percent year-to-date, but still (19.5%) above the multi-year lows of 13.66 seen in mid-March.

ETF Action
Volume dried up Friday and the lack of activity was particularly noteworthy in the exchange-traded fund market. A total of 773 million shares traded in the SPDR 500 Trust (SPY), PowerShares QQQ (QQQ) and other exchange traded funds, according to preliminary numbers compiled by Trade Alert. The volume is about a third less than the typical volume for the ETF market. There wasn’t much macroeconomic news to guide the action, which might be one reason for the lack of market volatility and low volumes. In addition, with earnings results driving a lot of the activity, market action has turned mixed – with stocks posting strong results moving higher and those that miss seeing shares fall. This mixed earnings-related trading might be shifting some of the focus to stock-specific news and away from macroeconomic trends. It looks like it is becoming more of a stock picker’s market and there appears to be less interest in ETFs that track the broader market or sectors – at least for now.

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