Hot Option Plays: Inaction Leads To Reaction

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Cusick’s Corner 08-02-2012
The rhetoric continues and the initial market reaction has been negative. With no clear action coming from the Fed or the ECB, sellers have come in strong into the Midday. I am a little surprised that the bid has not scaled in at these levels but being patient is possibly the more prudent action. The Dollar strength, UUP, needs to abate before any meaningful buyers might potentially come in today. See you After Hours.

Stock market averages are sharply lower midday following round of steep losses across the Eurozone. Spain’s IBEX lost 5 percent and Italy’s MIB Index dropped 4.2 percent on the heels of the latest European Central Bank meeting. Officials left rates on hold and, while ECB President Draghi said the European Central Bank wants to join forces with other governments to buy back bonds, he conceded that German officials have reservations about the plan. ECB officials are still working on further plans to help troubled European nations. Details are expected to emerge over the next few weeks. Investors were probably anticipating more decisive action today. Yields are once again ticking higher in Spain and Italy. Stocks moved broadly lower. The euro is down .6 percent to 1.215 against the dollar. In the US, the Street is still abuzz about Knight Capital’s erroneous trade that affected 150 Big Board stocks Wednesday. Jobless claims were also in focus ahead of tomorrow’s key payroll data. Claims increased by 8,000 last week to 365,000 and in-line with expectations. A separate report showed Factory Orders unexpectedly falling .5 percent in June. A .6 percent increase was expected. Crude oil prices sank $1.17 to $87.74 and gold gave up $15.4 to $1591.9 an ounce. On Wall Street, the Dow Jones Industrial Average is down 158 points and holding near session lows. The NASDAQ lost 22. CBOE Volatility Index (.VIX) is up .18 to 19.14. Overall options volumes are picking up after several days of slow trading, with about 3.5 million calls and 3.5 million puts traded across all the exchanges through 11:30am ET.

Bullish Flow
Green Mountain Coffee Roasters (NASDAQ:GMCR) is a bright spot today and volume is surging after the company released earnings after the closing bell yesterday. While the headline EPS number topped expectations and GMCR also announced a share buyback, the company guided earnings numbers lower for 2012 and 2013. Shares fell to a low of $15 in extended hours trading Wednesday, but have since rallied and are now up $5.22 to $23.13 on impressive turnover of 21.5 million shares. Options on the stock are heavily traded as well. 72,000 calls and 75,000 puts traded in the name. The five most actives are weekly options that expire after tomorrow. Weekly 22 puts, 24 calls and 20 calls top the list. Of the 147,000 contracts traded, 33.6 percent are in the 8/3 Weeklys, 3.2 percent in the 8/10 Weeklys, and 33.2 percent in the August options. Therefore, only 29 percent of the volume in GMCR options is beyond the August term – as short-term players are reacting to the volatility in the share price.

Genworth (NYSE:GNW) is off 30 cents to $4.18 and an interesting options trade on the mortgage insurance company today is a December 5 – 7 call spread for 23 cents, 14000X. A source on the floor informs us that the investor bought 14,000 December 5 calls on the stock for 32 cents and sold 14,000 December 7 calls at 9 cents. The spread seems to be a high risk-reward play on hopes for a rebound in shares through the December expiration. The stock has dropped 56 percent from the highs seen in February and fell yesterday after the company reported earnings. GNW, which has been under pressure from shareholders to spin off losing operations, also said spinning off its mortgage insurance unit might not be viable right now. Today’s spread trade appears to reflect a contrary view on the situation.

Bearish Flow
Kraft Foods (NYSE:KFT) is off 44 cents to $38.95 and one of thirty Dow stocks moving lower through midday Thursday. KFT is due to report earnings after the closing bell. The stock is drifting lower and players are showing interest in KFT September puts ahead of the news. Sep 35s are the most actives. 4,975 traded. Sep 38 and 39 puts are also seeing interest. Some investors might be hedging positions with puts amid volatility in the equity market today and ahead of Kraft’s earnings report. However, shares don’t tend to see much volatility around earnings. KFT gained 1.5 percent on 2/21 when profits were reported and lost .9 percent on 5/4. The average daily post-earnings move over the past three quarters is 1.9 percent.

Mittal Steel (NYSE:MT) is down today after Standard & Poor’s cut its rating on the company to BB+/B with a negative outlook. The credit rating agency cites weaker-than-expected earnings and poor demand for steel as being among the reasons for the downgrade. The stock is off $1.62 to $14.32 on heavy trading of more than 10 million shares. Meanwhile, 4,100 calls and 12,000 puts traded on the steelmaker. September 14 puts are the most actives. 1,920 traded. December 9, August 15, and September 15 puts are seeing interest as well and implied volatility in the options on the stock rose 15 percent to 54.

Unusual Volume
Green Mountain Coffee Roasters (NASDAQ:GMCR) options volume is running 4X the (22-day) average, with 155,000 contracts traded and put volume accounting for 52 percent of the volume.

Knight Capital (KCG) options volume is 22.5X, the average daily, with 137,000 contracts traded and put volume representing for 58 percent of the activity.

Hewlett Packard (NYSE:HPQ) options volume is running 3.5X the average daily, with 116,000 contracts traded and put volume accounting for 75 percent of the activity.

Increasing options activity is also being seen in AIG, First Solar (FLSR), and DELL.

Implied Volatility Mover
Implied volatility in the options on Pitney Bowes (NYSE:PBI) is up amid high put volume heading into earnings. The maker of mail processing equipment is due to report after the closing bell today. Shares are down 45 cents to $12.80 and falling to 52-week lows ahead of the news. About 10,000 puts and 1,900 calls traded on the stock. Sep 10, 11 and 12 puts are the most active and implied volatility in PBI options jumped 39.5 percent to 69.

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