Hot Option Plays: Low Volume Short Shakeout

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Cusick’s Corner 08-16-2012
Data has been solid and volume low. There’s been no real catalyst for the shorts, the market grinds in the direction of least resistance — up. Pushing the trading envelope in these trading environments in my experience has never panned out, so forcing a trade beyond a scalp is not really advisable. Dips continue to be bought and the shakeout at this stage is happening to the shorts as we squeeze higher. Bonds continue to slide and beneficiaries of the move out of bonds are the Consumer Discretionary, XLY, Technology, QQQ/XLK, and for yield seekers Healthcare, XLV. With the drought of sellers upon us to the upside, the trickle up continues. Remember to close any of your European-settled August index options, i.e. SPX/NDX/RUT etc. See you After Hours.

Stock market averages are holding gains with help from earnings news and gains in overseas markets Thursday. Japan’s Nikkei rose 1.9 percent overnight and closed above 9,000 for the first time in more than a month on hopes for the global economy. In Europe, Spain’s IBEX rallied 3.3 percent and Italy’s MIB Index gained nearly 2 percent. The euro is up .5 percent to 1.2355 against the dollar after Germany’s Merkel reiterated ECB President Draghi’s vow to do whatever is necessary to save the euro. Crude oil rose another 71 cents to $95.04 per barrel and gold gained $12.5 to $1619 an ounce. On the economic front, the news was less bullish. Weekly jobless claims increased by 2,000 to 366,000 in the period ended 8/11. Economists were expecting 368,000. July Housing Starts were down to an annual rate of 746K, from 754K and below expectations of 763K. Philadelphia Fed was down to -7.1 and below expectations of -5.0. But Cisco (NASDAQ:CSCO) is up 8.2 percent and leading both the Dow Jones Industrial Average and the NASDAQ to higher ground on the heels of its earnings report. Walmart (NYSE:WMT) is down 3.4 percent and weighing on the Dow in the wake of its profit report. Still, the Dow is up 41 points through midday and the NASDAQ added 18.5. CBOE Volatility Index (.VIX) is up .22 to 14.85. Overall options volumes are picking up ahead of the expiration, with about 3.6 million calls and 3.1 million puts traded across the exchanges through 11:40am ET.

Bullish Flow
TakeTwo (NASDAQ:TTWO) is seeing relative strength and increasing call activity today. Shares of the video game-maker have added 55 cents to $9.93. Meanwhile, 11,000 calls and only 290 puts traded on the stock so far. The top trade is a 5000-lot of September 11 calls at 20 cents per contract this morning on NYSE-ARCA exchange. An investor sold the block and is possibly closing a position on the heels of today’s advance in the shares. Open interest in the Sep 11 calls on TTWO is 10,348. Beyond that, most of the options flow has been in smaller sizes. August 10, September 12, and January 12.5 calls are among the most actives. No news on the stock today, but some players might be reacting to headlines yesterday that activist investor Carl Icahn has increased his stake in Take Two.

Cheniere Energy (LNG) is off 21 cents to $14.29 and options volume on the liquefied natural gas company is running 3X the daily average, being driven by a hefty call ratio spread. The investor bought 10,000 December 16 calls on the stock for $1.23 per contract and sold 20,000 December 19 calls at 40 cents. The 1X2, for 43-cent debit, appears to be a bullish play targeting a move to $19 per share (the higher strike) through the expiration, which represents a 33 percent advance over the next four months. The stock is up 64.7 percent year-to-date, but with most of the gains scored during the first few weeks of 2012. The stock is at the same level today as it was six months ago.

Bearish Flow
Coinstar (NASDAQ:CSTR) is up $3.07 to $51.29 in heavy trading of more than 5 million shares after the New York Post ran a story suggesting that the company is in discussions about a possible sale. Speaking at a conference today, a Coinstar executive was asked about the speculation and said he didn’t know where the story came from. Options flow in CSTR is interesting as 24,000 puts and 17,000 calls traded on the stock. August 50 puts, which are now 2.5 percent out-of-the-money and expiring after tomorrow, are the most actives in the name. 11,145 traded and two-thirds of the flow has been at the offer – which suggests buying interest. Some investors are possibly buying puts to help hedge gains in the stock in case the story proves unfounded and shares erase the gains before the weekend.

Nuskin Enterprises (NYSE:NUS) is off $1.21 to $41.29 in active trading of 2.4 million shares and apparently falling today in reaction to a negative report from Citron Research. Shares of the beauty products company are down and options volume is 3X the daily average. 12,000 puts and 2,780 calls traded in NUS so far. August and September 35 and 40 puts are the most actives.

Unusual Volume
Cisco Systems (NASDAQ:CSCO) options volume is running 2.5X the (22-day) average, with 289,000 contracts traded and call volume accounting for 66 percent of the volume.

AIG options volume is 2X, the average daily, with 95,000 contracts traded and call volume representing for 51 percent of the activity.

Huntsman (NYSE:HUN) options volume is running 15X the average daily, with 75,000 contracts traded and call volume accounting for 67 percent of the activity.

Increasing options activity is also being seen in SINA, NetApp (NASDAQ:NTAP), and Gamestop (NYSE:GME).

Implied Volatility Mover
Implied volatility in the options on Electronic Arts (EA) is up today on reports the company has approached private equity firms about a possible buyout. The stock is up $1.10 to $14.19 in active trading of 8.5 million shares. Trading in the options is 11.5X the daily average. 49,000 calls and 17,000 puts so far. 30-day ATM implied volatility in EA is moving up 14.5 percent to 38.5.

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