Hot Option Plays: Late Day Squeeze

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Cusick’s Corner 05-23-2012
One of my associates characterized today as, “dramatically unchanged” (thanks Alex) and he is right, the equities and commodities bounced, and the Dollar and the Bonds crawled back from the highs. The weak shorts were squeezed, the longs fought hard to hold 1300 in the S&Ps, but have some overhead resistance at the 1320 level. It will be interesting to see if the shorts in Metals come in overnight and early in the morning session after a decent bounce in Silver, SLV, and Gold, GLD. Claims data and Durable Goods come out premarket which will give us some more details on the health of growth in the economy. See you Midday.

Stock market averages erased midday losses and finished mixed Wednesday. Steep losses overseas set the table for morning weakness on Wall Street. Japan’s Nikkei tumbled 2 percent and Hong Kong’s Hang Seng lost 1.3 percent. Sharp losses were seen across the Eurozone as well. Italy’s MIB Index fell 3.3 percent, Spain’s IBEX lost 3.1 percent, and France’s CAC 40 gave up 2.7 percent. Crude oil fell below $90 on worries about the economy and bearish weekly inventory data. The primary concern is that Greece might leave the euro and roil the European banking system during a precarious time for the region. Disappointing guidance from DELL weighted on the tech sector. The only economic stat of the day showed April New Home sales to a better-than-expected 343,000 annual rate. The data had little impact and the Dow was deep in the red through midday. However, a late-afternoon rebound fueled by short covering sent stocks broadly higher. There didn’t seem to be a specific catalyst for the turnaround, but it did coincide with soothing comments from a Federal Reserve official. Fed’s Kocherlakota explained that a case could be made for new Quantitative Easing and the Federal Reserve has tools to curb the EU debt crisis. At the end of the day, the Dow had erased nearly all of its loss and was down just 7 points. The NASDAQ bounced into positive territory and added 11.

Bullish
Pan American Silver (NASDAQ:PAAS) shares were up 85 cents to $17.13 in active trading of 2.7 million shares despite weakness in the metal today. Silver prices slipped 38 cents to $27.80 and have dropped more than 25 percent since late-February. Nevertheless, options order flow on PAAS seemed bullish today, as 13,000 calls and 3,200 puts traded on the Vancouver-based silver miner. January 25 calls, which are 46 percent out-of-the-money, were the most actives. More than 5,000 traded, including a 3000-lot for 85 cents when the market was 75 to 90 cents. June 18 and January 20 calls were also busy. The stock fell more than 40 percent from late-February until earnings were reported on May 16. PAAS then hit a 52-week low of $14.80 before rebounding 15.7 percent through today. The call buying might reflect expectations that shares are oversold and are due to recover more of the big losses in the weeks/months head.

Bullish trading was also seen in American Eagle Outfitters (NYSE:AEO), Coventry Healthcare (NYSE:CVH), and Manitowac (NYSE:MTW).

Bearish
Hewlett Packard (NYSE:HPQ) weighed down the Dow Jones Industrial Average. Shares lost 3.2 percent to $21.08 and were the biggest losers in the Dow after peer Dell Computer posted weaker-than-expected earnings and issued a disappointing sales forecast. Trading in HP options was brisk. 134,000 calls and 121,000 puts traded on the stock. The top trades were in the Weekly options that expire in two days. One investor apparently bought 5,000 21 puts for 96 cents and sold 5,000 19 puts at 21 cents, setting up a Weekly 19 – 21 put spread for a 75-cent net debit. HP is out with earnings after the closing bell and is up to $22.63 per after announcing lower profits and plans to cut jobs. If shares stay above $21, the 21 and 19 puts will expire worthless and the debit for a Weekly 19 – 21 would be at risk. If shares give back the gains and fall to $19 or more by Friday afternoon, the Weekly 19 – 21 spread will be worth $2.

Bearish trading was also seen in RedHat (NYSE:RHT), Anadarko Petroleum (NYSE:APC), and Abbot Labs (NYSE:ABT).

Index Trading
It was another busy day in the CBOE Volatility Index (.VIX) index trading pit. The market’s “fear gauge” rallied early to 24.62, but then gave back the gains in afternoon action and lost .15 to 22.33. In options trading, 349,000 calls and 130,000 puts traded on the index. The top trade was 16,750 June 30 calls for $2.27 per contract. The trade surfaced in morning action and might have been a short-term call purchase to hedge the risk of increasing volatility. However, after the late-day reversal, the market for the June 30 call on VIX is now $1.60 to $1.75. 37,693 contracts traded total, making it the most active options in the volatility index today. July 32.5, June 24, and June 32.5 calls were the next most actives.

ETF Action
Bearish sentiment was seen in some of the financial ETFs Wednesday. SPDR Financials (XLF) fell in morning trading, only to erase the losses and finish up a nickel to $14.06. Options volume was 85,000 calls and 281,000 puts. June, July and August 13 puts were among the most actives. Meanwhile, the Proshares UltraShort Financials (SKF), which is a leveraged ETF designed to move inverse to the sector, gave up early gains and finished down 37 cents to $48.05. SKF options volume hit 4.5X the daily average, with 7,000 calls and 2,140 puts traded on the ETF. Deep out-of-the-money July 105 calls were the most actives. High volume in downside puts on XLF and upside calls on SKF seems to reflect the extreme levels of bearish sentiment that have developed towards the banks and brokers during the market decline in May. The extreme negativity might have created an oversold market and set the table for the dramatic rebound Wednesday. Important Information: Inverse ETFs are designed to achieve their investment objective on a daily basis are not designed to track the underlying index or benchmark over a longer period of time. Inverse and leveraged ETFs that are reset daily are unsuitable for investors who plan to hold these products for longer than one trading session. Over longer periods of time, leveraged and inverse ETF performance can differ significantly from their daily objective due to the effects of compounding.

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