Hot Option Plays: Post-Election Shorts Squeezed After Hours

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Cusick’s Corner 11-09-2012
The market was able to hold and then squeeze the post-election shorts today. Crude, USO, and Gold, GLD, performed really well today and held up after the President’s speech on how a budget will be locked before year-end. Have a good weekend.

Stock market averages scored modest gains through midday and trading was choppy from that point forward. Data released early seemed to ease some of the recent anxiety about the economic outlook after the University of Michigan reported that its index of consumer sentiment rose to 84.9 in mid-November, from 82.6 last month and better than the 83.0 that was expected. A separate report showed Wholesale Inventories up 1.1 percent in September and .7 percent more-than-expected. At the same time, the Trade Balance narrowed to $41.5 billion in September, from $43.8 billion and much narrower than the $45.4 billion that was expected. Overall, the data might have helped ease some of the anxiety about the upcoming fiscal challenges facing political leaders in Washington. Overseas, Asia’s markets finished mostly lower, but trading has turned mixed through much of Europe. The euro lost another .3 percent and now trades for 1.271 against the buck. Crude oil rose 96 cents to $86.05 and gold gained $5.5 to $1731.5. On Wall Street, the Dow Jones Industrial Average was up 50 points at midday, but trimmed its gain to only 4 points. The NASDAQ gained 9.3. For the week, the Dow lost 2.1 percent and the NASDAQ dropped 2.6 percent.

Bullish
CBS showed some resilience this week. Shares of the media company gained 5 percent and were helped a bit higher by earnings Thursday. CBS added another 52 cents to $34.88 Friday. In options action, an interesting three-way spread traded on the media giant in afternoon action when an investor sold 5,000 June 31 puts on CBS at an average of $1.925 per contract, bought 5,000 June 37 calls for $2.50, and sold 5,000 June 41 calls at $1.05. In other words, downside June 31 puts were sold to help finance a June 37 – 41 call spread, and 67.5 cents was collected on the spread. It looks like a new position because volume exceeds open interest in all three contracts. If so, the investor is writing puts and making a statement that they are willing to buy the stock at the put strike price. At the same time, they are opening a spread in upside calls in order to participate if the stock moves higher rather than lower through the June expiration.

Bullish trading was also seen in NI Holdings (NASDAQ:NIHD), Hertz (NYSE:HTZ), and Sirius Satellite (NASDAQ:SIRI).

Bearish
Lockheed Martin (NYSE:LMT) had a rough week. Shares came under fire with other aerospace/defense names Wednesday following the 2012 Presidential elections and lost 4 percent on the week. LMT ticked 6 cents higher to $89.98 today and a noteworthy spread surfaced on the stock when an investor bought 10,000 Jan 85 puts on LMT for $2, sold 20,000 Jan 80 puts at $1, and bought 10,000 Jan 75 puts at about 60 cents. The spread has the hallmarks of a Jan 75 – 80 – 85 put butterfly spread. That is, the investor bought 75 and 85-strike puts for the wings of the spread, and sold twice as many of the 80 puts for the body of the butterfly. If so, it’s a bearish spread (with a dynamic similar to buying a Jan 80 – 85 put spread and selling a Jan 75 – 80 put spread), which offers its best payout if the stock slides to $80 through the Jan 2013 expiration. An investor with a large position in LMT might have initiated the trade to help hedge shares from the risk of further losses through year-end.

Bearish trading was also seen in Goodyear Tire (NYSE:GT), JC Penney (NYSE:JCP), and ACI Worldwide (NASDAQ:ACIW).

Index Trading
The Mini-SPX (.XSP) Index saw more volume than usual. XSP is a pint-sized version of the S&P 500 equal to 1/10th of the SPX. So, with the S&P 500 adding 2.34 points to 1,379.85 today, XSP edged up .23 to 137.98. The index is similar to the more actively traded SPDR 500 Trust (SPY). The SPY gained 12 cents to $138.16. The key difference between .XSP and SPY is that one is a cash index and one is an exchange-traded fund. Consequently, SPY shares can be bought and sold like shares of stock. A cash index like SPX or XSP cannot be purchased. They are merely barometers for the market’s performance. Consequently, the settlement of XSP and SPY options is different as well. While exercise and assignment of SPY options involves the transfer of shares, the XSP settlement is for cash. Options on the SPY have proved much more popular in recent years. 2.5 million contracts traded today. Meanwhile, 1,455 XSP options changed hands, which is 14X the daily average for the product. SPX, which is the big daddy in the index market due to its higher volume and large notional size, saw active trading of almost 900,000 contracts.

ETF Action
Market Vectors Gold Miners Fund (GDX) lost 74 cents to $50.74 on the day and added 1.9 percent on the week. Trading in the options on the ETF was active Friday. 50,000 calls and 22,000 puts traded on the ETF. The top trade was a butterfly spread, in which the investor bought 14,000 December 63 calls on the ETF for 8 cents per contract, sold 7,000 December 58 calls for 38 cents, and sold 7,000 December 68 calls for 2 cents. So, they collected 24 cents on the Dec 58 – 63 – 68 call butterfly spread, 7000X, and are possibly closing a position on diminishing hopes for a substantial rally in the miners through the December expiration, which is in 6 weeks. If bought, a Dec 58 – 63 – 68 call fly offers its best payout if the underlying moves to the middle strike or, in this case, $63 per share.

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