Hot Option Plays: Buck Breaks

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Cusick’s Corner
As I noted in the Midday, I am looking at certain sectors for confirmation of trends. One sector that I am monitoring to measure the country’s economic health is Transports, IYT (i.e. Trucking/Airlines etc). This sector has been stuck, range-bound 91-95, and if we break either level then we could get a better picture of the state of economic growth and this could also act as a potential catalyst. The Buck, UUP, continues to break and the Euro, FXE, continues to hold. If the Euro can get some momentum to the upside, break $1.33, then we could see some potential upside in Equities. This could also spark interest in Gold, GLD which is currently lagging what has previously occurred after such a move in the Currencies. See you Midday.

Stock market averages slipped on economic news, but finished off session lows Monday. The domestic economy was back in focus early in the day after a report released before the opening bell showed Personal Incomes up .4 percent and Spending increasing by .3 percent in March. Economists were expecting increases of .2 percent and .5 percent, respectively. Separately, Chicago PMI, a gauge of regional manufacturing activity, fell to 56.2 in April, from 62.2 in March and well below economist estimates of 60.0. The poor data seemed to keep any rally attempts in check through midday and losses across the Eurozone also weighed on morning action. France’s CAC 40 helped pace the slide with a loss of 1.6 percent. Action in the commodities market was uninspired as well. Crude oil lost 15 cents to $104.78 per barrel and gold added $1 to $1666 an ounce. The Dow Jones Industrial Average traded in a very narrow 52-point range and lost 14 points on the day. The NASDAQ shed 22.8 points.

Bullish
Pfizer (NYSE:PFE) is a name worth watching tomorrow morning. The pharmaceutical-maker, and component of the Dow Jones Industrial Average, is due to release its earnings before the opening bell Tuesday. The stock traded down 18 cents to $22.90 on heavy volume of 59 million shares Monday ahead of the news large blocks of stock printed late and in extended hours, including a 17.4 million share block for $22.93. Meanwhile, 102,000 calls and 36,000 puts traded in Pfizer today. Weekly $23 calls, which are now 10 cents out-of-the-money and expiring at the end of this week, were the most actives. More than 31,000 traded. May 23 calls were the second most actives. 27,950 changed hands. Some investors might be taking positions in upside calls ahead of the profit report and hoping for a post-earnings pop in the stock. However, PFE hasn’t been a big earnings mover lately. The stock slid .8 percent on Jan 31 after the company last released results.

Bullish trading was also seen in Domino’s (NYSE:DPZ), Suncor Energy (NYSE:SU), and Synaptics (NASDAQ:SYNA).

Bearish
Humana (NYSE:HUM) shares came under fire Monday after the provider of healthcare plans and services reported earnings that failed to live up to Street expectations. HUM was hit for a $7.14 loss to $80.68 per share on heavy volume of 7.3 million. By way of comparison, typical volume for HUM is about 1.5 million shares. Meanwhile, 9,150 calls and 7,025 puts traded on the stock, which is 6.5X the daily average. The top trade was an apparent “risk-reversal”, in which the strategist sold 1,410 Aug 85 calls on HUM at $2.48 to buy 1,410 Aug 75 puts for $2.88. The combo, for a 40-cent debit, might have been initiated to “collar” a position in shares and hedge the risk of further losses in the stock. If so, by writing $85 calls, the strategist is a willing seller of the stock at the strike price.

Bearish trading was also seen in Manitowac (NYSE:MTW), Suntech Power Holdings (NYSE:STP), and American Eagle (NYSE:AEM).

Index Trading
CBOE Volatility Index (.VIX) gained .83 to 17.15 and options in the VIX pit were actively traded today. 372,000 calls and 201,000 puts traded on the “fear gauge” Monday. A large four-way spread accounted for a good chunk of the activity after one investor sold 47,000 May 23 puts on VIX at $4.90 and sold 47,000 June 29 calls at $1.00 to buy 48,000 July 20 puts for $2.15 and 48,000 August 25 calls for $3.10. In other words, a May 23 – Jun 29 strangle was sold at $5.90 to buy a July 20 – Aug 25 strangle for $5.25. 65 cents was collected on the package and the activity probably rolls a position out from the May puts and Jun calls to Jul puts and August calls. A similar May 23 – Jun 29 strangle traded on the VIX on March 2 for $5.75 and today’s roll possibly exits that position for a small win, while opening a new position in a July 20 – Aug 25 strangle. Note that VIX options are priced off of forward values and not the actual spot index.

ETF Action
Share volume in the ETF market dried up Friday and the lack of activity continued Monday. A total of 788 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 twenty-five percent less than the typical volume for the ETF market. Meanwhile, 1.4 million calls and 2 million puts traded across the various ETFs, which is about 40 percent less than normal. With a dearth of market volatility and not much economic news to guide the action, the tone of trading has taken a wait-and-see feel ahead of key data due out later this week, including monthly jobs data Friday.

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