Hot Option Plays: What Would Little Annie Do?
Cusick’s Corner 06-01-2012
In the infamous words of Annie, “Just thinkin’ about Tomorrow, clears away the cobwebs and the sorrow – ’til there’s none!” Now I do not know if I am betting my “bottom dollar there’ll be sun” early next week but every Fed official and central banker in the world will be asked what they will do to stop this. Now whether or not government intervention is right or wrong, traders need to be indifferent and prepare for the choppy nature of this market only to potentially increase. Volatility popped 10% today and that kind of move is hard to watch as a long equities trader for the mere fact that uncertainty is increasing and the magnitude of the chop in the market is as well. Try to review your risk in the portfolio in terms of real “tail” risk, meaning if the market really falls apart, i.e. 2+ standard deviations, and what you would need to do to potentially mitigate it. This does not sound like fun but this is what disciplined traders do. “So, ya gotta hang on ’til Tomorrow, you’re always a day, away!” Talk to you next week.
Stock market averages suffered steep losses Friday. Poor jobs data added to already elevated investor anxiety levels after the Labor Department reported this morning that the US economy added only 69,000 jobs in May. Economists were expecting a gain of 150,000. The unemployment rate edged up to 8.2 percent and .1 percent more than expected. Hourly earnings rose .1 percent and .1 percent less than expected. The day’s other data didn’t off much support. Construction spending was up .3 percent in April and .2 percent less than expected. ISM Manufacturing showed a decline to 53.5 and .5 below expectations. Trading was volatile overseas as well. While Japan’s Nikkei lost 1.2 percent and paced an advance across Asia, Germany’s DAX took a 3.4 percent hit and France’s CAC 40 lost 2.2 percent. The Dow Jones Industrial Average fell hard in morning trading and the weakness continued throughout the session. At the closing bell, the Dow Jones Industrial Average had suffered a 274-point skid and closed just 11 points off session lows. The NASDAQ tumbled nearly 80 points.
Boeing (NYSE:BA) was down $2.37 to $67.24 and one of thirty Dow stocks to close in the red Friday. Not a single member of the industrial average ticked into positive territory during the trading session. Options on the aerospace and aircraft manufacturer were more active than usual. 14,000 calls and 11,000 puts traded in Boeing today. The top trades were part of a spread in the longer-term January 2014 options. An investor apparently bought 2,000 January  79.5 calls on Boeing for $9.85 sold 2,000 Jan14 90 calls at $2.50. The spread, for a $7.35 debit, appears to be a new position. The investor might see recent weakness in the stock as an opportunity for a bullish long-term move in BA. However, rather than buying shares outright today, they’re taking a position in long-dated calls that give the right to buy (or call) the stock for $67.5 through January 2014. Selling the $90 calls helps to finance some of the premium paid for the 67.5 calls, and also limits the upside beyond $90 per share. In other words, the investor is possibly looking for the stock to climb above current levels (breakeven of a call spread at expiration is the lower strike plus the debit), but not significantly beyond $90, through early-2014.
Bullish trading was also seen in Duke Energy (NYSE:DUK), Halliburton (NYSE:HAL), and ON Semiconductor (NASDAQ:ONNN).
Citigroup (NYSE:C) loses $1.12 to $25.39 on a volatile day on Wall Street. Options volume on the bank included 84,000 calls and 73,000 puts, which is about typical volume for Citi these days. The top trades in Citi options were part of a three-way spread. In this advanced options play, 4,330 Jun 25 puts were sold on Citi at 70 cents per contract, 4,330 July 25 puts bought for $1.61 and 4,330 July 20 puts sold at 43 cents. All three legs of the spread traded on the International Securities Exchange and data from ISE indicate that all three legs were opening positions. In this spread, the investor was selling Jun 25 puts to buy a July 25 – 20 put spread, paying a 48-cent debit. If so, they seem to expect shares to hold above $25 (-1.5%) over the next two weeks and for the June 25 puts to expire worthless at the June expiration (14 days), but then for Citi shares to fall below that level by mid-July and for the spread to widen before the July expiry (49 days).
Bearish trading was also seen in Tibco Software (NASDAQ:TIBX), Fastenal (NASDAQ:FAST), and Cemex (NYSE:CX).
CBOE Volatility Index (.VIX) added 2.60 points to 26.66 and finished at session highs Friday. VIX has rallied 26.7 percent in just three days and is now at its best levels so far in 2012. Trading in the VIX pit was active, and volume clearly lopsided. 344,000 calls and 93,000 puts traded on the volatility index today. The ten most active VIX options on the day were call options. September and October 30s were the most actives. More than 30,000 traded in both contracts, as some investors are now possibly looking beyond this summer and to the historically volatile fall months of September and October.
Puts on the PowerShares QQQ (QQQ) were busy for a second day. 798,000 contracts traded on the ETF yesterday. Shares lost $1.65 to $60.41 and volume in QQQ options Friday was roughly 828,000 puts and 276,000 calls. June 60 puts, which are now 41-cents out-of-the-money, were the most actives. 144,144 contracts traded. July 55 puts saw the second most volume. 110,800 contracts changed hands. The so-called Qs are an exchange-traded fund designed to equal roughly 1/40th of the NASDAQ 100 Index (.NDX). Some investors were probably taking positions in the downside June 60 and July 55 puts on QQQ to hedge stock portfolios on concerns about further volatility in the shares listed on the NASDAQ Stock Market.
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