Hot Option Plays: US Stocks Rebound

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Cusick’s Corner 06-08-2012
US stock markets had a nice recovery this week — the major averages finished the week to the upside, S&Ps closed on the highs at 1326. I will be watching the Consumer names, XLY; after this week’s poor data I want to keep an eye on this sector which makes up 2/3 of the GDP, if there is weakness in this sector then the market may come under pressure. I will also be watching for a challenge to the upside in the upcoming weeks and when or if it happens, it will be very telling if we can break formidable upside resistance, 1350 on the S&Ps. Enjoy the weekend.

Stock market averages have recovered from morning losses and are holding gains late-Friday. Poor economic data overseas, including slumping French business confidence and falling German exports, set the table for early weakness on Wall Street. France’s CAC 40 led the modest retreat in Eurozone equity markets and lost .7 percent on the day. The Euro slid 1 percent to 1.243 against the dollar, but has since bounced back a bit and has recaptured 1.25. In the US, focus turned to the Trade Balance, which narrowed to $50.1 billion in April and a bit less than the $49.7 billion that had been expected. Stock market averages wavered at the open, but then found some support and ticked into positive territory on light volume through midday and then the gains were extended into the afternoon session.

Bullish
Banco Santander (NYSE:STD), a Spanish bank, has had a good week. In fact, the stock closed up 17 cents to $6.11 today and on a seven-day 16 percent winning run higher. The stock was trading at 52-week low of $5.25 on May 30 before the gaining its footing and trending higher on hopes for a rescue package for the debt troubled country. EU officials will be meeting this weekend to discuss a possible bailout of Spanish banks. Optimism seems to be building in STD. Not only are shares grinding higher in recent days, but options on the stock were busy Friday as well. June 6 and July 7 calls are the most actives in STD so far today.

Bullish trading was also seen in Akamai (NASDAQ:AKAM), Sony (NYSE:SNE), and Foster Wheeler (NASDAQ:FWLT).

Bearish
Kroger (NYSE:KR) shares closed down 17 cents to $21.57 in active trading of almost 8.8 million shares and seeing relative weakness today after Cantor Fitzgerald lowered their price target on the stock. The firm cites a more competitive operating environment. The cautious commentary comes ahead of Kroger’s June 14th earnings report. Some investors seem to be hedging ahead of the news. July 21 puts on Kroger are seeing active trading today. The flow has been in small sizes. The biggest trade is a 139-lot traded at the 50-cent asking price. 3,360 July 21 puts now traded in KR against 438 contracts in open interest.

Bearish trading was also seen in First Energy (NYSE:FE), AK Steel (NYSE:AKS), and ATP Oil and Gas (NASDAQ:ATPG).

Index Trading
What a difference a week makes! After falling 32 points last Friday, the S&P 500 Index (.SPX) closed up 10.67 points in afternoon action and set for its best weekly gain so far in 2012. The S&P has entirely erased last Friday’s big slide. Meanwhile, CBOE Volatility Index (.VIX), which tracks the expected volatility priced into SPX options, closed down .49 to 21.23 and has given up over 22 percent since hitting multi-month highs of 27.73 Monday morning. Overall trading volumes in the index market were busy as stocks rallied Wednesday and amid volatile intraday action Thursday. Today, however, the pace slowed heading into the weekend.

ETF Action
SPDR Financial Fund (XLF) saw interesting trading activity Friday. The ETF closed up 17 cents to $14.13 on lighter volume of 60 million shares. By way of comparison, typical volume through midday is more than 70 million. Meanwhile, 200,000 options traded in XLF, which is about the typical volume. The top trades are part of a straddle, in which the investor bought 20,000 July 14 puts on XLF at 68 cents and bought 20,000 July 14 calls for 41 cents. The July 14 straddle, for $1.09 net debit, has traded more than 40,000X today and appears to be a bet that the financial names will see high volatility in the weeks ahead. XLF is up 5 percent since Monday and down 9.7 percent since May 1. A long straddle typically pays off if the magnitude of the move in the underlying (higher or lower) is sufficient enough to offset the negative impact from time decay.

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