Hot Option Plays: All Eyes On Premarket

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Cusick’s Corner 05-03-2012
The chop continued but no further pressure to the downside or upside into the After Hours. The S&Ps finished the day right on short-term support, 1385, and I think it might be quiet overnight. All eyes will be on the premarket data — Payrolls and Employment. These two may drive a lot of the shelved emotion going into the session. I did not like that these offensive sectors, XLK, XLE, XLF, XLY, were all lower vs. the S&P benchmark. The only one that pulled back dramatically was Energy, XLE -1.6%, but there was some froth in this sector coming into today. See you Midday.

Stock market averages slipped in cautious trading ahead of key payroll numbers. The underlying tone of trading was positive early Thursday after the Labor Department reported that Weekly Jobless Claims declined by 27,000 to 365,000 in the period ended April 28, which was better than the 375,000 that was expected. The better-than-expected reading comes ahead of key jobs data tomorrow. Economists expected Friday’s report to show the economy adding 162,000 payrolls in April and the unemployment rate remaining unchanged at 8.2 percent. However, modest gains at the open were lost early in the session after the ISM Services Index fell to 53.5 in April from 56 in March (55.5 was expected). The Street was also buzzing about the action in Green Mountain Coffee Roasters (NASDAQ:GMCR), which was trading down 48 percent on the heels of its earnings report and guidance. Weakness in crude and gold seemed to take toll on some of the commodity-related names. Crude fell $2.59 to $102.63 and gold lost $17 to $1637 an ounce. Meanwhile, the Dow Jones Industrial Average gave 62 points and the NASDAQ took a 35-point hit.

Bullish
Sotheby’s (NYSE:BID) shares and options were busy today, the day after the company auctioned off Edvard Munch’s “Scream”. The painting fetched $120 million and a new record for an auction of piece of art. Yet, BID lost $1.93 to $37.17 on high share volume of 1.7 million. Meanwhile, options order flow on the auctioneer was interesting, as 5,560 calls and 550 puts traded in Sotheby’s – a ratio of ten-to-one. May 42 calls were the most actives. 3,370 traded vs. 4,413 in open interest. Some investors might have been liquidating positions on diminishing hopes for a move beyond $42 through the May expiration. However, May 39 calls were the next most actives and were seeing opening activity. 1,376 traded against 467 in open interest. Some traders might have been buying the upside calls on the view today’s sell-off was overdone.

Bullish trading was also seen in MGIC (NYSE:MTG), Walter Energy (NYSE:WLT), and MGM.

Bearish
Radian (NYSE:RDN), a Philadelphia, PA credit insurance company, lost 20 cents to $2.42 in active trading of 11 million shares on reports the company received approval to release $55 million in contingency reserves. The stock was down, possibly on concerns about the company’s working capital needs, and has now tumbled 44.4 percent since March. Some players in the options market seem to be worried about additional losses, as 25,000 puts and 4,290 calls traded in RDN today. August 1.5 and 2 puts were the most actives, with 10,000 traded in both contracts. Some of the flow appeared to be spread trading, and buying Aug 2 puts and selling the 1.5s. If so, it’s bearish action targeting additional losses, to $1.5 or below, through the August expiration.

Bearish trading was also seen in EBIX, Silicon Graphics (SGI), and Arch Coal (NYSE:ACI).

Index Trading
Anxiety about Friday’s jobs reports and key elections in the Eurozone seem to be affecting investor sentiment in recent days. The S&P 500 Index (.SPX) lost 10.74 points to 1,391.57 today and is on a two-day 14-point losing skid since ADP reported weak payroll numbers Wednesday morning. The Labor Department releases its monthly jobs report tomorrow and, across the pond, uncertain elections in France and Greece could potentially trigger volatility in the Eurozone. CBOE Volatility Index (.VIX) ticked up .68 to 17.56 today and is up 5.8 percent over the past two days. Yet, while the “fear gauge” is up lately, there are few real signs of bearishness on Wall Street. Volumes have been very light. For example, 495,000 calls and 551,000 puts traded in the SPX, VIX, and other cash indexes today, which is only 87 percent the recent average daily volume, according to Trade Alert. If there was extreme negativity, SPX puts and VIX calls would probably be seeing much higher volumes.

ETF Action
An interesting three-way spread trades in the SPDR Retail Trust (XRT) Thursday. XRT, which is an exchange-traded fund that holds shares of leading companies from the retail industry, was down 71 cents to $61.72. In afternoon trading, an investor apparently sold a 15,000-lot of May 60 puts on the ETF at 64 cents, bought 15,000 June 61 puts for $1.82 and sold 15,000 June 56 puts at 56 cents. In other words, May 60 puts were sold to buy a June 56 – 61 put spread and a 62-cent debit was paid on the three-way. The strategist is possibly looking for XRT to hold above $60 through the May expiration, in 16 days, but then fall to $56 or less through the June expiration (43 days). Or, it’s maybe a roll of a bearish position out from May to June. An investor with a large portfolio of retailing names might have initiated the spread to hedge shares.

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