Hot Option Plays: Will The Bulls Be Tested

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Cusick’s Corner 08-21-2012
Traders typically see this type of trading action into a holiday, where there’s little activity, low volume, and the market trending to new levels, S&P on the highs for the year. I am still not fading this market but there needs to be some sort of check to test current holders and give an opportunity for new entrants. This commentary is a broken record but I am not going to force the trade. The breakouts in Equities, Metals, GLD/SLV, and Euro, FXE, have me sizing up potential positions that I might look to build into on a pullback. See you After Hours.

Stock market averages are holding gains on hopes for the global economy Tuesday. Strength across European equity markets helped set the tone for a morning advance on Wall Street. Italy’s MIB Index rallied 2.4 percent on hopes for Eurozone periphery countries. There’s talk that EU officials will iron out plans to lower interest on Greek bailout funds when officials meet in the days ahead. A record injection of funds into Chinese banks from the People’s Bank of China added to optimism about the global economic outlook. In the US, the economic calendar is light today. A report on Existing Home Sales is due out tomorrow morning before minutes from the latest Federal Reserve meeting are released Wednesday afternoon. Investors will scrutinize the minutes for signs that the Fed is leaning towards further Quantitative Easing measures to help the sluggish economy. The Dow Jones Industrial Average is up 43 points through midday trading Tuesday. The NASDAQ added 14 points. CBOE Volatility Index (.VIX) is up .10 to 14.12. Overall options volumes are running a bit higher than normal and the ratio of calls to puts traded reflects the bullish underlying tone, with about 3.2 million calls and 2.2 million puts traded across the exchanges through 11:00am ET.

Bullish Flow
Goldman Sachs (NYSE:GS) is moving to new 3-month highs in active trading Tuesday. After leading in the financial space Monday with a 1.6 percent gain, GS is up another $1.96 to $107.24 in active trading of 1.9 million shares. Meanwhile, 21,000 calls and 11,000 puts traded on the bank. September 105, 110, and 115 calls are the most actives. Implied volatility in the options on the stock is moving down 2.5 percent to 24 and at the lower end of the recent range, which is about 22 and 44. There’s no company news on the stock to explain the relative strength in Goldman shares this week. The S&P 500 is up 5.73 points to 1,423.86 this morning and moving beyond its multi-year highs of 1,422.38 from early-April. Some investors possibly view the news highs for the broader market as a positive trend for one of Wall Street’s biggest investment bankers.

iShares Emerging Markets Fund (EEM) is up 28 cents to $40.23 after news that China injected a record $3.4 billion into its banking system helped spark gains across many emerging markets Tuesday. Russia, Taiwan, and India’s equity markets all rose 1 percent. Large blocks of options trades on EEM this morning seem to express confidence in the emerging markets through yearend after an investor sold 9,000 December 38 puts on the ETF at $1.38, bought 13,500 December 42 calls for $1.60, and sold 13,500 December 45 calls at 54 cents. If bought-to-open, the ( 1X1.5) three-way spread is targeting a move in EEM to $45 through the December expiration, or an 11.9 percent climb over the next 122 days. By writing $38 puts, the strategist is also stating that they’re willing to buy (have put) shares of the ETF at that price.

Bearish Flow
Green Mountain Coffee Roasters (NASDAQ:GMCR) is up 85 cents to $25.19 and one player in the options market might see trouble brewing for the stock, as a bearish three-way spread was initiated on the stock Tuesday morning. In this strategy, the investor apparently sold 2,900 December 26 calls on GMCR at $1.17, bought 2,900 December 23 puts for $3.20 and sold 2,900 December 18 puts at $1.27. In other words, Dec 26 calls were sold to buy a Dec 18 – 23 put spread and 76 cents was paid for the three-way spread. A shareholder might have initiated the position to help hedge recent gains in the stock. Shares have rallied roughly 40 percent month-to-date.

FTI Consulting (NYSE:FCN), a Baltimore, MD management company, is up 56 cents to $26.68 and put volume is outpacing call volume on the stock by a ratio of ten-to-one. 5,540 puts and 515 calls traded in FCN so far, which is almost 10X the daily average options volume. The largest trade is a 2,000 March 25 puts traded for $2 per contract when the market was $1.65 to $2. 2,110 now traded. March 21 and September 24 puts are the next most actives in FCN. Shares, which were at 52-week lows of $22.88 on August 2, are up 15.5 percent in a little over two weeks. Today’s apparent put buying on the stock might be hedging activity by shareholders to help protect the recent gains.

Unusual Volume
Best Buy (NYSE:BBY) options volume is running 2.5X the (22-day) average, with 64,000 contracts traded and put volume accounting for 58 percent of the volume.

Cheneire Energy (LNG) options volume is 2X, the average daily, with 24,000 contracts traded and call volume representing for 94 percent of the activity.

Calpine (NYSE:CPN) options volume is running 19.5X the average daily, with 21,000 contracts traded and call volume accounting for 100 percent of the activity.

Increasing options activity is also being seen in Western Union (NYSE:WU), Urban Outfitters (NASDAQ:URBN), and NRG.

Implied Volatility Mover
Baidu.com (NASDAQ:BIDU) sees relative weakness today and implied volatility in the options on the Chinese Internet company is moving higher. BIDU is down $5.42 to $125.49 in active trading of 5.6 million shares. By way of comparison, typical volume through midday is about 2.5 million. The stock, which was at multi-month highs near $134 Friday, is down more than 6 percent to start the week. Meanwhile, options on the stock are busy as well. 42,000 calls and 26,000 puts so far. No news to explain the heightened activity, but levels of implied volatility in BIDU options moved up 12 percent to 33.

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