Hot Option Plays: Not Fighting The Tide

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Cusick’s Corner 05-16-2012
This trend down appears to still be in place and at this stage the risk aversion trade is on. The Bonds, TLT, have been very active, money has been flowing into US debt instruments. This is impacting the commodity markets heavily, especially Grains, DBC, and Metals, XME; any additional negative news out of the EU will only catalyze the safe haven trade. See you After Hours.

Stock market averages are holding modest gains on a relatively quiet morning of trading on Wall Street. Domestic economic news seemed mostly supportive of higher stock prices after a report showed Housing Starts up to an annual rate of 717,000 in April, from 699K last month and better than the 680K that was expected. Separately, it was reported that Industrial Production was up 1.1 percent in April and .6 percent better-than-expected. A lot of attention remains overseas and concerns about the state of the EU amid a political impasse in Greece. Trading was orderly today, however, with major equity markets across the Eurozone trading mixed. France’s CAC 40 added .3 percent, but Germany’s DAX slipped .3 percent. The euro is flat at 1.2728 against the dollar. Crude oil is off 97 cents to $93.01 and gold gave up another $14.4 to $1542.7 an ounce. However the Dow Jones Industrial Average is holding a 43-point midday gain and the NASDAQ added 6 points. CBOE Volatility Index (.VIX) is down .17 to 20.80. Trading in the options market is active and continues to reflect a cautious underlying tone, with approximately 4.2 million calls and 5.1 million puts traded across all the exchanges through 12:00pm ET.

Bullish Flow
Weatherford (NYSE:WFT) is up 25 cents to $12.70 in active trading of 7.2 million shares after JP Morgan upgraded the stock to Overweight from Neutral. Meanwhile, 28,000 calls and 3,360 puts traded on the oil driller so far today. The largest trades (by number of contracts) so far are part of a spread, in which the investor apparently bought 7,300 June 15 calls on the stock at 18 cents per contract and sold 7,300 June 18 calls at 4 cents. The spread, for a 14-cent debit, has traded 10000X and seems to express the view that WFT might recapture $15 per share, or more, through the June expiration – which represents an 18.1 percent surge over the next 30 days. The stock has tumbled 27.2 percent over the past two months. The debit is at risk if the stock hold below $15 and the position is left open through the expiration.

Darden Restaurants (NYSE:DRI) is up $4.07 to $55.58 on high volume of 4.1 million shares. The stock saw a midday spike to 52-week highs on no news, but heavy volume. 18,000 calls and 4,500 puts traded on the stock. May, June and July 55 calls, which are now 58-cents in-the-money, are the most actives in the name. High call and share volume seems to hint at some pending news or chatter in the name, but it is still unclear what is motivating the activity in DRI Wednesday morning.

Bearish Flow
Dell Computer (NASDAQ:DELL) is down 8 cents to $15.26 and options volume on the computer-maker is running 2.5X the daily average. 23,000 puts and 6,700 calls traded on the stock so far. Most of the put volume is due to one spread trade, in which the investor apparently bought 10,000 June 15 puts on DELL for 50 cents and sold 10,000 June 14 puts at 23 cents. The spread, for a 27-cent net debit, seems to be a bearish view on the stock targeting a possible move to $14 through the June expiration, or an 8.3 percent slide over the next four and a half weeks. An investor might have initiated the spread as a hedge ahead of the company’s earnings, which are due out next week (5/22).

Sara Lee (NYSE:SLE) is up 12 cents to $21.21 and options order flow on the snack food company is somewhat unusual today, as some investors appear to be opening new positions in May 21 puts on the stock. The contract is 5.7 percent out-of-the-money and expires at the end of the week. 5,019 now traded and, with 94 percent trading at the ask and open interest of 2,040, opening buyers seem to be dominating the flow. It’s unclear why players are placing short-term positions on SLE. The stock is down about 5 percent since earnings were reported two weeks ago. There hasn’t been much news on the ticker since that time.

Unusual Volume
JC Penney (NYSE:JCP) options volume is running 4X the (22-day) average, with 123,000 contracts traded and put volume accounting for 68 percent of the volume.

Gold Fields (NYSE:GFI) options volume is 11.5X the average daily, with 57,000 contracts traded and call volume representing for 95 percent of the activity.

DELL options volume is running 2.5X the average daily, with 29,000 contracts traded and put volume accounting for 77 percent of the activity.

Increasing options activity is also being seen in Marvell Tech (NASDAQ:MRVL), Kinross Gold (NYSE:KGC), and Pepsico (NYSE:PEP).

Implied Volatility Mover
JC Penney (NYSE:JCP) is a big mover today after the retailer’s earnings fell short of expectations. The stock is down $5.36 to $27.96 on volume of 26 million shares, which is roughly 10X the expected for midday action. Trading in the options market is very heavy as well. 44,000 calls and 89,000 puts traded on JC Penney so far. Some players might closing out winning positions in June 29 puts and May 28 puts, which are the most actives and are now in-the-money. Levels of implied volatility have eased 28 percent to 45 now that the earnings news is out.

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