Hot Option Plays: Quiet Session After Hours

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Cusick’s Corner 10-08-2012 After Hours
The market bounced off the worst levels and the drivers were Small and Mid Cap stocks, IWM/MDY. I highlight this move because these higher flying, higher beta, moving stocks are a good barometer of the domestic economy and if there is stress here at home then it will show in this segment. Technicians are seeing spots where bearish sentiment and pressure is building in Metals, Energies and Tech, so this needs to clear up if the bulls are to get any traction. See you Midday.

Stock market averages suffered modest losses on a quiet day of trading Monday. With government offices and the bond market closed for Columbus Day, weakness in overseas markets set the table for morning losses on Wall Street. France’s CAC 40 lost 1.4 percent to help pace a decline across the Eurozone after officials failed to reach agreement on Greece over the weekend and as EU finance ministers now begin a meeting in Luxembourg. The euro slipped .5 percent to 1.297 on the dollar. The action in the commodities market was mostly lackluster as well, with crude down 22 cents to $89.66 per barrel and gold slipping $3.9 to $1776 an ounce. But at the end of the day, there wasn’t much news flow to guide trading today. The Dow Jones Industrial Average traded in a 58-point range and lost 26 points on the day. The NASDAQ gave up 23.8 points.

Bullish
Walter Energy (NYSE:WLT), a Birmingham, AL metallurgical coal producer, was up 5 percent to $33.78 in active trading of 3.8 million shares on a day of modest strength in the sector (ACI, ANR, CNX, JRCC also higher). On the options front, some investors were showing interest in options on WLT Monday. About 10,000 calls and 3,300 puts traded in the name, a ratio of three-to-one. These weekly 35 strike calls expire 10/12 and are now 3.6 percent out-of-the-money, were the most actives on Walter today. 2,290 traded against 789 in open interest. October 32.5 calls and December 42.5 calls were the next most actives. Some investors are possibly looking for the coal sector to heat up in the days/weeks ahead, but rather than buying shares outright today, they might be buying these call options on stocks in the sector. One call option gives the investor the right to buy 100 shares of stock for a set price [[strike]] through a specific period of time [[expiration]]. Note that ANR, another name in the same space, was highlighted in today’s midday report.

Bullish trading was also seen in Cigna (NYSE:CI), Alpha Natural Resources (NYSE:ANR), and Skyworks Solutions (NASDAQ:SWKS).

Bearish
Corning (NYSE:GLW) lost a penny to $13.29 and options volume on the specialty glass-maker was 5X the daily average today, driven by a massive block of January 15 calls. One investor apparently sold more than 60,000 contracts at an average of 22.1 percent per contract. Open interest is about 59,000 contracts and so today’s hefty call write appears to be a new position. An investor with a large holding of the stock is possibly writing calls as part of a buy-write or covered call strategy. Or, the massive premium sale is possibly a naked call write with no position in shares or options. Either way, selling the calls seems to express the view that there is limited upside in the stock through the January 2013 expiration. Shares have performed well lately and are in the midst of a two-month 14.5 percent move higher.

Bearish trading was also seen in Moody’s (NYSE:MCO), Adtran (NASDAQ:ADTN), and Console Energy (NYSE:CNX).

Index Trading
Overall volumes were anemic today due to the Columbus Day holiday. In the index market, for example, 290,000 calls and 386,000 puts traded on the CBOE Volatility Index (.VIX), the S&P 500 Index (.SPX) and other cash indexes, which is only 46 percent of the average daily volume for the index market these days, according to Trade Alert data. Yet, VIX added .78 to 15.11 and VIX October 16 calls were among the day’s most active options today. 25,970 traded. Some investors might be taking positions in the contract on concerns about increasing volatility later this week. October options on the volatility index expire in 8 days. The last day to trade is next Tuesday.

ETF Action
iShares China Fund (FXI) lost 47 cents to $34.90 today after Chinese investors returned from a one-week holiday and sent stocks broadly lower Monday. Weighing on sentiment: The World Bank lowered its 2012 economic growth for East Asia to the slowest levels seen in 11 years. One player in the options market seems concerned about additional losses for FXI and today initiated a February 30 – 40 risk-reversal on the fund at 30 cents, 10000X. That is, they sold 10,000 February 30 puts on the ETF at 57 cents to buy 10,000 February 40 calls at 27 cents. The combo appears to be a new position (volume exceeds open interest) and might have been initiated to hedge or “collar” a position in FXI shares.

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