Hot Option Plays: Scalpers Market

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Cusick’s Corner 08-13-2012
There’s low volume and the big money is seemingly still on the sidelines, probably the rationale behind the market ranges that we have been recently experiencing. This tests the discipline of any trader but it also separates the weak hands from the strong. The data and earnings continue to be meager, but not enough for the Fed to back up their banter. The bounce of the Euro Currency, FXE, overnight and into the Midday has the market still range-bound. The S&Ps look poised to stay in the 1395-1405 range, so keeping the powder dry is today’s modus operandi. See you After Hours.

Stock market averages slipped at the open on disappointing economic data from overseas. Japan’s economic growth slowed to a 1.4 percent annualized pace in the three month period to June. Economists were looking for 2.7 percent growth. Adding to the worries about a worldwide economic slowdown, Bank of America/Merrill lowered its forecast for Chinese economic growth to 7.7 percent from 8 percent. In the US, the news flow is light so far. The pace of earnings releases slows this week, but a number of retailers – including Dow component Home Depot (NYSE:HD) tomorrow morning – will release results this week. On the economic front, there are no stats due out today. Retail Sales and PPI numbers are slated for Tuesday morning. Like much of last week, trading might remain range-bound until there’s a more significant news catalyst to move the market one way or the other. The Dow Jones Industrial Average limped into the Midday with an 89-point loss. The NASDAQ is down 15.5 points.

Bullish Flow
Stillwater Mining (NYSE:SWC) adds 8 cents to $9.57 and early options order flow on the Billings, MT platinum and palladium company seems to reflect bullish sentiment, as 12,000 calls and only 100 puts traded on the stock so far. August 10 calls, which are now 4.5 percent out-of-the-money and expiring at the end of this week, are the most actives. 9,370 contracts changed hands. Aug 11, Sep 10, Oct 12, and Oct 13 calls on SWC are also seeing interest. It’s not clear what is driving the activity, as there are no headlines on the ticker. Earnings were reported last week.

Focus Media (NASDAQ:FMCN) adds $2.41 to $25.79 in active trading of 4.6 million shares on reports the company received an offer to go private for $27 per share in cash. The stock was halted, news pending, in the pre-market session and then launched higher when trading resumed in the regular session. 19,000 calls and 6,375 puts traded on the stock so far. By way of comparison, average daily volume in FMCN is about 9,300 contracts. August 23 and 24 calls are the most actives and implied volatility in the options on the Chinese Internet media company dropped 59 percent to 46.

Bearish Flow
Groupon (GRPN) sees relative strength early ahead of earnings. The company is due to release results after the closing bell Monday. After gaining nearly 12 percent Friday, GRPN was up another 7.5 percent to $8 per share this morning. Trading in the stock is active. 9,200 calls and 7,065 puts so far. August 6 puts, which are 25 percent out-of-the-money and expiring at the end of the week, are the most actives. 4,830 traded. August 8 and 9 calls are the next most actives. Today’s earnings release represents the company’s third profit report as a publicly traded company. Some players seem to be anticipating volatility. Not only are August out-of-the-money puts and calls actively traded, the August 8 straddle (puts and calls) currently trades for $2 and 25 percent of the underlying spot price.

Campbell Soup (NYSE:CPB) is up $1.06 to $34.37 and options volume is running 35X the daily average, being driven by a hefty call spread on the stock. The investor apparently bought 6,400 Aug 35 calls on CBP this morning at a nickel and sold 6,400 Nov 36 calls at 25 cents. The Aug 35 – Nov 36 call spread, for a 20-cent credit, probably rolls a position opened on April 4 when 6,400 August 35 calls were sold at 47 cents. Now, with just 4 days until the August options expire, the investor is buying to close the position for a nickel while opening a new position in Nov 36 upside calls for 25 cents. It’s possibly part of long stock, short call (covered call) strategy on the soup-maker.

Unusual Volume
Focus Media (NASDAQ:FMCN) options volume is running 2X the (22-day) average, with 21,000 contracts traded and call volume accounting for 81 percent of the volume.

Campbell Soup (NYSE:CPB) options volume is 38X, the average daily, with 14,000 contracts traded and call volume representing for 97 percent of the activity.

Stillwater Mining (NYSE:SWC) options volume is running 7X the average daily, with 12,000 contracts traded and call volume accounting for 99 percent of the activity.

Increasing options activity is also being seen in Savient Pharmaceuticals (NASDAQ:SVNT), Gamestop (NYSE:GME), and Westco International (NYSE:WCC).

Implied Volatility Mover
CBOE Volatility Index (.VIX) remains under pressure. The market’s “fear gauge” is off .52 to 14.22 and falling to its lowest levels since late-March. VIX is now down 23.1 percent in less than two weeks. Today’s drop in the index is also noteworthy because the S&P 500 is down 2 points. VIX, which tracks the expected or implied volatility priced into the S&P 500 options, typically moves higher when the S&P moves lower. Now, some players in the options market are possibly positioning for a rebound in the index. August 27 and 28 calls on the VIX are among the most actives in the VIX pit. However, the activity is possibly closing trades, as the options are now deep out-of-the-money and expiring in 8 days. August 15 puts are the most actives in the VIX pit so far this morning. More than 5,000 traded.

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