Hot Option Plays: Get The Windex Out

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Cusick’s Corner 05-22-2012
Get the Windex out — cures many ailments (My Big Fat Greek Wedding reference). A headline came across about the cost of a potential Greek pullout from the Euro by a former leader of Greece, causing the Euro Currency to pull back to $1.2680 -.86% and challenging critical lows of $1.26. A break of the Euro Currency of this level would not be a good signal for equities. The Congressional Budget Office also came out with data that was bleak for taxes and budgets which put the economy and jobs up in the air. Right now the focus will be on the EU, watch EEM – see ETF Action below, continued weakness may put pressure on the upside. I will be watching new home sales, while not much is expected it will be interesting if inventories continue to fall. I will also be watching the Crude inventories; Crude has been under pressure and is right at support of $92.50. See you Midday.

Stock market averages erased midday gains and finished with losses Tuesday. Strength across Asia and Europe’s equity markets set the table for steady trading on Wall Street after Japan’s Nikkei rose 1.1 percent and Hong Kong’s Hang Seng added .6 percent. Stocks were broadly higher across the Eurozone as well. Spain’s IBEX rebounded for a 2.1 percent gain and Italy’s MIB rallied 3.4 percent. Markets were broadly higher across Germany, France, and the UK amid talks of introducing Eurobonds to help stem the still spreading debt crisis. In the US, attention turned to a report on Existing Homes Sales, which was up to an annual rate of 4.62 million in April. While economists were expecting 4.65 million, the number marked an improvement from the 4.47 million in March. The data seemed to help the stock market averages higher in morning action and the Dow was up 40 points at midday. However, some of the commodities were weak. Crude oil lost $1.41 to $91.45 and gold fell $22 to $1567 an ounce. The euro saw a late-day slide and fell below 1.27 on the buck. The decline seemed to weigh on Wall Street. The Dow Jones Industrial Average also came under pressure in the final hour and, at the closing bell, was down 1 point and 73 points off session highs. The NASDAQ lost 8.

Bullish
A number of healthcare names saw increasing call volume Tuesday. Humana (NYSE:HUM) was one of them. Shares jumped $1.08 to $76.83 after Wells Fargo upgraded the stock to Outperform from Market Perform. Meanwhile, options volume on the stock was 4X the daily average. Approximately 12,000 calls and 2,000 puts traded on the Louisville, KY healthcare plan provider, a ratio of six-to-one. June 80 calls, which are 4.1 percent OTM and expiring in 24 days, were the most actives. 4,666 traded. August 97.5, July 80 and July 82.5 calls were also busy. In addition to the analyst upgrade, the call buying seemed to be part of broader activity seen throughout the healthcare sector on Tuesday.

Bullish trading was also seen in Health Management Associates (HCA) and Wellpoint (NYSE:WLP).

Bearish
Bearish activity was buzzing in the coal names Tuesday. Patriot Coal (NYSE:PCX) was one of the big losers. Shares fell to a record low of $1.36 in morning trading on a Dow Jones article that suggested the company was considering restructuring to meet short-term financing needs. The stock was later halted after the company issued a statement saying refinancing efforts are ongoing. The stock recovered some of the losses when trading resumed, but still lost $1.18 to $2.18 on surging volume of 86 million shares. Meanwhile, 105,000 puts and 40,000 calls traded on Patriot Coal. June 2 puts were the most actives and 30-day implied volatility in the options on the stock surged 106 percent to 248.

Bearish trading was also seen in James River Coal (NASDAQ:JRCC), Peabody Energy (NYSE:BTU), and Console Energy (NYSE:CNX).

Index Trading
CBOE Volatility Index (.VIX) hit a morning low of 19.98, drifted a bit higher through midday, and then saw a late-day spike to close up .47 to 22.48. The late-day jump in volatility was apparently triggered by comments from former Greek Prime Minister Papademos, saying that a Greek exit from the EU is being considered. The euro slid on the headline and is down 1.1 percent to 1.268 against the dollar. Meanwhile, VIX saw a late-day jump and options volume on the index was a very active 331,000 calls and 214,000 puts. June 24 calls were the most actives. 51,300 contracts changed hands, as some investors might have been buying upside call on the index on concerns about the risks of another spike in market volatility in the weeks ahead.

ETF Action
While the Dow erased early gains and finished lower, global equity markets were mostly higher Tuesday and one player in the options market seems to be anticipating the trend to continue. iShares Emerging Markets Fund (EEM) was down 40 cents to $37.78 and one investor apparently sold 26,000 July 32 puts on the ETF at 40 cents to buy 26,000 July 39.5 – 40.5 call spreads for 40 cents. The three-way, for even money, takes advantage of skew and the fact that downside puts on EEM have substantially higher levels of implied volatility relative to upside calls. The best payoff happens if shares move to more than $40.5 through mid-July. At that point, the puts expire worthless and the call spread widens to $2. The risk is that EEM falls below $32 per share and the short puts are in-the-money before the expiration. The three-way spread trader is therefore a willing buyer of the underlying at the strike price of the short puts, which is 15.3 percent less than the current market price.

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