Hot Option Plays: Look For Volume

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Cusick’s Corner 05-18-2012
The term capitulation (surrender or giving up) has been often used when referencing the latest market action. While this action has been negative, I have not seen the volume that might represent a bottom or “V” bottom setting up. Looking at late summer and early fall 2011 SPY charts, when the market turned north there were 300 million plus shares of daily volume in SPY. This negative action actually has been a positive to Gold, GLD, and in markets which have popped off their lows which now could be acting as more of a safety trade because Bonds, TLT, and the Dollar have been running quite fast and are much further on the upside move than beaten down Gold. Remember this is expiration Friday for equity options, so manage that risk before the close. See you After Hours.

Market action is mixed through midday Friday. With no domestic economic news to guide the morning trading, the underlying tone remains cautious after the S&P 500 fell in 10 of the last 12 trading sessions. Eyes remain on events in Europe and trading was relatively orderly across Eurozone equity markets. Germany’s DAX lost .7 percent and France’s CAC 40 slipped .3 percent. The euro edged up .2 to 1.2725 on the buck. Wall Street opened steady as well and ahead of the much-anticipated Facebook (FB). The offering was delayed a bit and then, after an initial 12 percent rally, the stock fell back to its $38 offering price. Trading has been whippy since that time, but the offering seemed to be somewhat of a disappointment. The broader market fell shortly after Facebook shares started trading and the Dow is now down 14 points midday. The NASDAQ lost 11 points. CBOE Volatility Index (.VIX) slipped .35 to 24.14. Trading is active due to the expiration, with approximately 4.5 million calls and 5.7 million puts traded across all the exchanges through 11:40am ET.

Bullish Flow
Long-term trade in JC Penney (NYSE:JCP) Friday morning seems to reflect hopes for a rebound in the stock. Shares of the retailer are up 29 cents to $26.23 today, but have dropped 21.3 percent since earnings were reported Wednesday afternoon. A longer-term trade in the options market seems to reflect expectations for a rebound after a three-way spread traded in the January 2014 options on JCP. In this spread, the investor sold 5,000 $23 puts on the stock at $4.55, bought 10,000 $30 calls for $4.85 and sold 10,000 $37 calls at $2.70. In other words, downside puts were sold to buy 2X as many upside 30 – 37 call spreads. 25 cents was collected on the package and the investor is probably a willing buyer of the stock for $23 through Jan 2014. Therefore, they were willing writers of January 2014 $23 puts. The premium was used to buy an upside call spread.

Blackstone (NYSE:BX), a New York-based asset management firm, is up 15 cents to $11.69 and options volume on the stock through midday is 21,000 call and 1,350 puts. The flow includes a 13,000-contract block of September 13 calls for 66 cents per contract. It is an opening buyer, according to data from the options exchange. More than 17,000 now traded. Jun 13, Dec 13, and Jan [2014] $15 calls on BX saw interest as well. There are no headlines to explain the heightened activity and the order flow comes as shares saw a 5 percent rally off morning lows.

Bearish Flow
NASDAQ OMX Group (NYSE:OMX) is off 55 cents to $22.45 on heavy volume of 4.6 million shares and options on the stock are seeing active trading as well. 7,790 puts and 1,390 calls so far. May 23 puts, which are now 2.4 percent in-the-money and expiring after today, are the most actives. 4,160 traded. May 22 and June 23 puts are seeing interest as well. Implied volatility in NASDAQ options is up 15 percent to 33.5. There are no headlines on the stock. The bearish flow might reflect concerns about generally poor market conditions this week and also the lackluster debut in the highly-anticipated Facebook IPO, which started trading today on the NASDAQ Stock Market.

SPDR Financials (XLF) is off 6 cents to $13.87 in heavy volume of 64 million shares and options on the exchange-traded fund remain actively traded today. 249,000 puts and 65,000 calls so far. The flow includes a morning buyer of 50,000 June 13 puts for 21 cents per contract and a buyer of 23,000 August 13 puts for 54 cents. Some of the buying might be rolling out of May 14 puts, which are in-the-money and expiring after today. 64,500 XLF May 14 puts have traded so far today.

Unusual Volume
Sara Lee (NYSE:SLE) options volume is running 22X the (22-day) average, with 73,000 contracts traded and call volume accounting for 67 percent of the volume.

NetApp (NASDAQ:NTAP) options volume is 3X the average daily, with 55,000 contracts traded and call volume representing for 69 percent of the activity.

SPDR Utilities (XLU) options volume is running 9.5X the average daily, with 55,000 contracts traded and call volume accounting for 98 percent of the activity.

Increasing options activity is also being seen in Renren (RENN), Assured Guaranty (NYSE:AGO), and USG.

Implied Volatility Mover
Implied volatility in the options on Zynga (ZNGA) is easing on the heels of today’s Facebook IPO. Zynga makes games like Farmville and Drop 7 that are used with Facebook and there had been increasing interest in the options on the stock ahead of the offering. The stock fell to a low of $7.08 after FB made its debut, but has since recaptured some of the losses and is down 47 cents to $7.80. 33,000 calls and 17,000 puts traded on the stock and implied vols are easing 13.5 percent to 93.

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