Hot Option Plays: Tough One To Watch

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Cusick’s Corner 06-21-2012
Defense is in play today but the rapid drop caught many traders off guard and by end of day had wiped out 38% of the rally off the June 4th lows. We could see an attempt to bounce into the overnight trade and into the AM but that could be just weak shorts taking profits. It is clearer after today’s action that we are in a confirmed trend down. The bid could pop in at 1310, 50% retracement of this month’s rally, but the market will stress if there’s a break of 1300, 62% retracement. With the continued Dollar strength, UUP, the Commodity markets, DBC, USO, might stay under pressure. For those of you with possibly winning trades — manage them, do not let greed overwhelm you. There’s more headline risk after the close with the Moody’s news, so a lot can happen. See you Midday.

Stock market averages suffered steep losses in volatile trading as investors grappled with a host of different worries Thursday. On the economic front, a report released before the opening bell showed Jobless Claims declining by 2,000 to 387,000 last week. Economists were looking for 380,000. The Dow Jones Industrial Average opened steady despite the poor number, but then came under fire at 10:00am ET after the Philadelphia Fed Survey fell to -16.6 in June, from -5.8 the month before and much worse than the -.2 that was expected. Another report showed Existing Home Sales falling to an annual rate of 4.55 million last month and a bit less than 4.56 million that was expected. The List of Leading Indicators was a bright spot, increasing by .03 percent in May and .3 percent more than expected. However, the Philly Fed disappointment added to poor manufacturing numbers from China overnight (see today’s Bearish Flow) and concerns about the Eurozone also resurfaced after the EUR/USD pair slid 1.3 percent to 1.2545 on renewed worries about Spanish banks. In the US, media reports that Moody’s is set to update ratings on several banks today also weighed on investor sentiment. At the end of the day, the news flow offered very little fodder for the bulls. The bears were in control and sent the Dow Jones Industrial Average tumbling 250 points. The tech-heavy NASDAQ suffered a 71.4 point loss.

Bullish
Decker Outdoor (NASDAQ:DECK) lost $2.40 to $44.71 and fell to new 52-week lows today in active trading of 2.4 million shares. Options on the stock were also busy. 13,000 contracts traded, which is 3.5X the daily average. There were no apparent headlines to explain the higher volumes, but one large spread trade drove much of the options activity. In midday action, an investor sold 2,500 January 27.5 puts on DECK for $2.90, bought 2,500 January 52.5 calls for $4.50 and sold 2,500 January 65 calls at $1.45. The three-way spread traded on the NYSE-ARCA exchange and a source confirms that the investor sold the puts to buy the upside call spread – paying 15 cents for the spread. If so, they appear to be opening a new position and might expect the stock to get up from the deck and rally beyond the 52.5 call strike price by the Jan 2013 expiration. If not, they’re possibly a willing a buyer of the stock for $27.5 per share and are therefore writing 27.5 puts on Decker today.

Bullish trading was also seen in AK Steel (NYSE:AKS), NCR, and Acorda Therapeutics (NASDAQ:ACOR).

Bearish
Exxon Mobile (NYSE:XOM) came under fire today after crude oil prices lost 4 percent to less than $79 per barrel and fell to their lowest levels since early-October. Exxon shares lost $2.86 to $82.11 on the day. In options action, XOM was trading around $84.50 this morning when a July 80 – 85 put spread traded on the oil giant for $1.30, 10000X. In this spread, the investor apparently bought 10,000 July 85 puts on the stock for $1.68 and sold 10,000 July 80 puts at 38 cents. Shares fell more than $2 from that point forward and the spread is now worth roughly about $2.40.

Bearish trading was also seen in Ventas (NYSE:VTR), Jaguar Mining (JAG), and Pachex (NASDAQ:PAYX).

Index Trading
CBOE Volatility Index (.VIX) hit its lowest levels since early May when it fell to 16.77 this morning, but the early decline didn’t last long. VIX was back into positive territory mid-morning and rallied some more in afternoon action. At the end of the day, VIX was up 2.84 to 20.08 and had reclaimed the 20 “psyche” level. Trading in the VIX pit was relatively light, however. 272,000 calls and 145,000 puts traded on the index today. July 25 calls and July 20 puts were the most actives, with about 38,000 traded in each contract. July 28, 30, and 32.5 calls were the next most actives. Heavy interest in VIX upside calls is often a sign of increasing anxiety levels, as players in the options market take positions to hedge the risk of another round of high volatility in the equity market.

ETF Action
Options in the exchange-traded fund marketplace were busy today. 4.6 million puts and 3.3 million calls traded across all the ETFs today, which is well above the average daily volume of 6.5 million options, according to Trade Alert data. iShares China Fund (FXI) July 32 puts were the most actives. More than 118,600 traded and, as noted in the midday report, the flow included a block of 108,000 contracts traded for 60 cents per contract on CBOE. FXI lost $1.43 to $32.52 on the day. The next three most actives were puts on the SPDR 500 Trust (SPY). SPY lost $3.04 to $132.44 and more than 101,000 Weekly 133 puts, which expire after tomorrow, changed hands. June Quarterly 130 and Weekly 132 puts were the third and fourth most actively traded options contracts in the US market Thursday. Portfolio hedging was in full swing.

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