Hot Option Plays: Watch Claims Data

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Cusick’s Corner 08-22-2012
To say that a day a trend makes would be presumptuous, meaning the market came off the worst levels, 1404 on the S&Ps, to finish the day revolved around unchanged. So the battle continues between 1400 and 1425 on the S&Ps with the bid continuing to pick up on the dips. While the intraday trend was looking weak, it just never played out that way and it would be hard to say that the close did nothing more than confirm that the bulls are at the ready to buy dips. The Claims data could challenge this thought process early in the session tomorrow, so I will keep an eye on the reaction to the data. See you After Hours.

Market action was mixed heading into the final hour of trading Wednesday. Trading was cautious early as worldwide equity markets slumped on worries about the global economy. Anxiety levels rose a bit after trade balance data showed a decline in Japan’s exports. In Tokyo, the Nikkei slid .3 percent. Hong Kong’s Hang Seng lost 1.1 percent. Stocks were broadly lower across the Eurozone as well, paced by a 1.4 percent slide in UK’s FTSE. However, on Wall Street, the selling didn’t gather much momentum and stocks seemed to find some support from Existing Home Sales. Sales of previously owned homes climbed to a 4.47 million annualized rate in July, from 4.37 million in June and a bit less than the 4.55 million that was expected. Market averages were little changed following the data, but then fell into the red midday heading into minutes from the latest Federal Reserve meeting on interest rates. Then the market strengthened a bit after the text showed that some Fed members are leaning towards large scale asset purchases. The Dow Jones Industrial Average closed down 31 points while the NASDAQ closed up 6 points.

Bullish
Cheniere Energy (LNG) sees a second day of bullish order flow. Open interest in calls on the liquefied natural gas company increased by 20,000 following a day of heavy trading yesterday. Shares closed up 54 cents to $14.78 today and options volume is running 2.5X the daily average. 29,000 calls and 4,970 puts traded today. October 16 calls are the most actives. More than 11,500 traded and included 10,000 traded for 50 cents when the market was 40 to 50 cents. Implied volatility is moving up 16 percent to 52, with Sep 15 calls, Sep 13 puts, and Sep 14 calls on LNG seeing active trading as well. No news on the stock. For whatever reason, some players in the options market seem to be anticipating continued strength in the stock. Shares have already rallied 70 percent year-to-date.

Bullish trading was also seen in American Capital (NASDAQ:ACAS), Discover Financial (NYSE:DFS), and Cheniere Energy (LNG).

Bearish
Michael Kors (KORS) is up 33 cents to $51.83 and an interesting spread traded on the Chinese apparel retailer Wednesday. In this spread, the investor apparently sold 10,000 September 49 puts on KORS at $1.55 to buy 10,000 October 45 puts for $1.55. The diagonal spread, for even money, appears to be a new position. If so, it seems to reflect expectations that the stock will hold above $49 (-5.2 percent) through the September expiration (30 days), but then possibly fall below $45 (-13 percent) through the October expiration (58 days). The stock has performed well lately, however, and is up 90 percent year-to-date. The stock reached a 52-week high of $52.88 last week. A shareholder might have initiated the spread to help hedge stock from Sept to Oct.

Bearish trading was also seen in Live Nation (NYSE:LYV), Kellogg (NYSE:K), and Smithfield Foods (NYSE:SFD).

Index Trading
CBOE Volatility Index (.VIX) added .53 to 14.02 Monday, 1 point to 15.02 yesterday, and finished up .09 to 15.11 today. High options volume is accompanying the move higher in the market’s “fear gauge”. 391,000 calls and 233,000 puts traded in the VIX pit today, which is about double the normal. VIX August options expired today and players were probably opening new positions in September now that the Aug options have come off the board. Interestingly, VIX deep out-of-the-money September 70 calls were the most actives in the index, with 47,225 traded. VIX Oct 20 puts, Sep 18 puts, Sep 19 calls, and Sep 19 puts were heavily traded as well.

ETF Action
iShares Small Cap Fund (IWM) closed down 39 cents to $81.09 and one player in the options market seems to be anticipating further weakness in the exchange-traded fund. A December (QTRLY) 72 – 79 put spread trades on the stock for $1.95, 12285X. In this trade, the investor bought 12,285 Dec 79 puts on the fund for $3.72 and sold 12,285 Dec 72 puts at $1.72 (December Quarterlys expire at the end of the fourth quarter). An investor with a large position in small cap names might have initiated the spread to help hedge a portfolio through yearend. Total volume in IWM is 39 million shares and 300K contracts, which is well below the recent average of 39 million shares and 439K options.

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