Hot Option Plays: Watch The Claims Data Tomorrow

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Cusick’s Corner 05-16-2012
Readers may not like where I have been going the last few Corners, but after a Greek run on the banks and mixed economic data, the major sectors, XLF, XRT, and XLY (offensive sectors) are at or close to challenging support. These levels that are being potentially challenged are game changer levels, especially in the Finance sector, where a break in the $14.50 could signal that the Bears have gained the momentum. If you narrow on the banking segment, the big boys like JPM, BAC are under pressure but the smaller regional banks, KRE, PNC, CYN, are all holding up much better and I will be keeping an eye on these segments. The Claims data has the potential to catalyze the pre-market; anything north of 365K could add more pressure to the market early. Tomorrow is the last day to trade cash-settled indices so tie up all loose ends. See you Midday.

Although stock market averages had moved modestly higher into midday with help from economic data, selling pressure resurfaced in the second half of trading Wednesday. Data released early 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. With relatively quiet action seen across European equity markets, stocks moved broadly higher on the data through midday. Modest gains didn’t last, however, and ongoing volatility in the commodities markets has been the subject of discussion among some investors. Crude oil lost another $1.36 to $92.62 and gold gave up $17.8 to $1539.30 an ounce. Minutes from the latest Federal Reserve meeting on monetary policy might have motivated some afternoon selling as well. While the text didn’t hold any surprises, it also failed to lay the groundwork for further monetary easing. For whatever reason, stocks moved broadly lower again in afternoon action and the Dow lost 33 points on the day. The tech-heavy NASDAQ gave up 19.72 points.

Bullish
Banking giant Citigroup (NYSE:C) lost 87 cents to $26.92 in active trading of 45 million shares and is on a four-day 12.6 percent losing streak. Shares are off nearly 30 percent since March 20. The decline might have motivated an investor to buy big blocks of calls on the bank today. Total volume was 166,000 calls and 86,000 puts. The two largest trades were initiated by the same investor. They bought 35,000 September 33 calls on Citi for 92 cents per contract and 32,500 November 34 calls for $1.16. Both blocks look like new positions in Citi (because volume exceeds open interest). The same investors also sold 1.85 million shares at $27.85. Taken together, the action is possibly part of a stock replacement strategy. That is, the investor had a large position in Citi shares and is liquidating it after the recent decline in the share price. At the same time, they’re buying upside calls on the bank to possibly maintain a bullish position that requires less capital.

Bullish trading was also seen in Morgan Stanley (NYSE:MS), Weatherford (NYSE:WFT), and Darden Restaurants (NYSE:DRI).

Bearish
161,000 puts and 73,000 calls traded on Microsoft (NASDAQ:MSFT) today. The stock lost 31 cents to $29.90 in active trading of 60 million shares and was one of 17 Dow stocks to finish lower. The top trades of the day in the software-maker were part of a four-way spread after 20,900 May 32 puts traded on the stock at $2.15 and 20,900 May 27 puts for a penny per contract. 20,900 June 32 puts traded on the stock for $2.27 and 20,900 June 27 puts at 17 cents. Taken together, the spread appears to be a roll with the investor closing a hefty May 27 – 32 put spread at $2.14 to open a new June 27 – 32 put spread for $2.10. If so, the investor collected 4 cents on the four-way and is possibly looking for the stock to fall (or to hedge a stock position) for another month. May options expire at the end of this week.

Bearish trading was also seen in Sara Lee (NYSE:SLE), Dell Computer (NASDAQ:DELL), and Estee Lauder (NYSE:EL).

Index Trading
Puts on the S&P 500 Index (.SPX) remain heavily traded. 700,000 puts traded on the S&P 500 Monday, which was the third highest put volume day for the product so far in 2012. 645,000 more traded yesterday. Today, volume in the SPX pits was roughly 914,000 puts and 397,000 calls, which is the second highest put volume day for the S&P 500 so far this year. The S&P 500 lost 5.86 to 1324.80 and some of the high put volume is probably related to the expiration. Many May index contracts stop trading tomorrow before the settlement value is computed Friday morning. May 1,300 puts on the SPX were the most actives. However, not all of the activity was in the May contracts, as June 1350 puts, June 1330 puts, and June 1350 calls on the S&P 500 were very busy today as well.

ETF Action
iShares Dow Jones Real Estate Fund (IYR) loses 77 cents to $62.16 and options volume in the ETF was 5X the daily average, with 97,000 puts and 7520 calls traded. Much of the put volume was due to one hefty spread trade, in which 39,500 September 58 puts were apparently bought on IYR for $2.08 and 39,500 September 50 puts sold for 76 cents. The spread, for a $1.32 net debit, appears to be a new position targeting a move to $50 or more through the expiration, which represents a 19.6 percent plunge through mid-September. A portfolio manager with substantial holdings in REITs and/or real estate companies might have initiated the bearish spread as a hedge.

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