Hot Option Plays: Tug Of War

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Cusick’s Corner 05-03-2012
We see an old fashioned tug of war into the Midday — the longs are attempting to take back ground, S&Ps at 1400, only to be pushed back to support by new shorts, 1394 on the S&Ps. This is choppy, sloppy action and going into the After Hours, the shorts appear to have taken control today. I will be waiting for the QE talk to potentially pick up as we get into the After Hours and approach the Unemployment number tomorrow morning. I do not expect too much in the way of fireworks, just for this sloppy, choppy action to continue. See you After Hours.

Stock market averages slipped following a round of mixed economic news and ahead of key payroll numbers due out tomorrow morning. Before the opening bell, 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 news seemed to help set the tone for positive morning trading, as 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 n April and the unemployment rate remaining unchanged at 8.2 percent. However, gains on Wall Street were lost early in the session Thursday morning and the ISM Services Index, which fell to 53.5 in April from 56 in March (55.5 was expected) weighed on morning trading as well. Green Mountain Coffee Roasters (NASDAQ:GMCR) is also getting noticed, as shares have been nearly cut in half on the heels of its earnings report and guidance. Weakness in crude and gold seems to be taking a toll on some of the commodity-related names. Crude is down $2.36 to $102.86 and gold lost $18.5 to $1635.5 an ounce. The Dow Jones Industrial Average is down 45 points and 9 points off session lows. The NASDAQ gave up 27.5 points. CBOE Volatility Index (.VIX) ticked up .64 to 17.24. Overall options volume is light again today, with approximately 2.8 million calls and 2.6 million puts traded across all the exchanges through 11:40am ET.

Bullish Flow
Walter Energy (NYSE:WLT) shares are up and options on the stock are busy today after the company released its latest earnings report. The stock rallied to $69.41 at the open and was recently up $3.60 to $67.40 in active trading of 3.6 million shares. At the same time, 21,000 calls and 6,930 puts traded in the name, which is more than double the daily average volume. May 85 calls, which are still 26.1 percent out-of-the-money even after today’s rally, are the most actives. 2,270 traded. Jun 65, May 70 and even Jun 100 calls on the stock are busy as well. The options order flow seems to include a mix of buyers and sellers, but also seem to reflect the bullish sentiment that is sending shares of the Birmingham, AL minerals and metals company higher Thursday.

MTG (NASDAQ:MGIC), the mortgage insurance company, is off 8 cents to $3.25 and has lost roughly 35 percent since March. Options flow on the stock is interesting, as 5,700 calls and only 200 puts traded on MTG through midday. The activity is focused on June 4 calls. More than 5,000 contracts changed hands, including a morning buyer of 727 contracts for 12 cents apiece on the International Securities Exchange. Data from the ISE confirm that the calls were being bought to open. If so, some investors might be expecting the stock to rebound, but rather than buying shares today they are buying options that give the right to buy (or call) the stock for a specific price (strike price) through a set date [[expiration]].

Bearish Flow
iShares Emerging Markets Fund (EEM) sees a hefty put purchase today. EEM is an exchange-traded fund that holds shares of companies from developing countries like China, Russia, and Brazil. The ETF is drifting down 28 cents to $42.13 and morning options trades include a buyer of 31,000 EEM June 40 puts for 67 cents per contract on the PHLX exchange. An investor is possibly buying downside puts on the fund to hedge the risk of increasing volatility across global financial markets ahead of key US jobs numbers Friday morning and important French elections over the weekend.

Arch Coal (NYSE:ACI) is down 24 cents to $8.26 and falling to new 52-week lows today after a plunge of more than 75 percent over the past twelve months. Shares have been under pressure in recent days after the company reported a wider-than-expected quarterly loss on May 1. Options volume on the stock is running 2X the daily average today, with 32,000 puts and 6,135 calls traded in the name. The action follows active trading the day before. 21,000 calls and 36,000 puts changed hands in ACI options yesterday. The ongoing slide in shares and the high put volume seems to reflect the bearish sentiment that continues to weigh on shares of the St. Louis-based coal producer.

Unusual Volume
Green Mountain Coffee Roasters (NASDAQ:GMCR) options volume is running 5X the (22-day) average, with 165,000 contracts traded and call volume accounting for 52 percent of the volume.

Herbalife (NYSE:HLF) options volume is 4X the average daily, with 54,000 contracts traded and call volume representing for 55 percent of the activity.

Visa (NYSE:V) options volume is running 2X the average daily, with 41,000 contracts traded and call volume accounting for 62 percent of the activity.

Increasing options activity is also being seen in MGM, Ross Stores (NASDAQ:ROST), and Level 3 (NASDAQ:LVLT).

Implied Volatility Mover
Implied volatility in the options on MGM is easing after the company reported a wider-than-expected quarterly loss before the opening bell Thursday morning. MGM is down 48 cents to $13.07 in active trading of 16 million shares. Options volume on the casino-operator is running 2.5X the daily average, with some investors apparently anticipating additional volatility ahead of the weekend. Weekly calls at the $13 and $14 strike, which expire after tomorrow, are the most actives. Meanwhile, implied volatility in MGM options is down 12 percent to 36.5 now that the earnings event-risk has passed.

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