Hot Option Plays: Headlines Dominating The Market Midday

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Cusick’s Corner 11-20-2012
Headlines continue to dominate the market into the Midday. There was a challenge early but while it may feel like the market wants to retest the downside, the news and data continue to hold up the bid at this stage. The Fed Chief did speak in front of the Midday and the tone did sound a little less accommodating than usual, halting any challenge to the upside that may have been mounting into his speech. There are also headlines out of the Middle East, not confirmed, that there is a tentative ceasefire in Gaza, which has the Energies, XLE, specifically Crude, USO, pulling back to their worst levels of the day. Watch the Financials, XLF, the big banks are mixed because some headlines have been hitting which suggest that Q4 EPS may be revised down. Volatility in the sector has been on the move as of late. XLF’s implied volatility is ~22, so I would keep an eye on this sector. It looks like we may be entering a choppy but range-bound remainder of the session. See you After Hours.

Stock market averages are lower after a steep drop in Hewlett Packard (NYSE:HPQ) offset optimism about another round of strong housing numbers. A report released before the opening bell showed Housing Starts improving to an 894K annual rate in October, from 863K and much better than the 840K that was expected. However, Building Permits, a better gauge of future activity, were at 866K and a bit less than the 870K that had been expected. In addition, Hewlett Packard shares have dropped 10 percent in the wake of its earnings report after the company disclosed a $9 billion charge due to an accounting irregularity. HP is one of 21 Dow stocks trading lower and the industrial average has given back 38 of yesterday’s 208-point surge. The NASDAQ dropped 6.4 points. Crude oil is off $1.15 to $88.13 and gold gave up $4.5 to $1730. In the options mart, CBOE Volatility Index (.VIX) is up .15 to 15.39. Overall options volume is slowing ahead of the Thanksgiving holiday and will probably slow even further tomorrow. About 2.5 million calls and 2.2 million puts traded across the exchanges through 11:10am ET.

Bullish Flow
Hewlett Packard (NYSE:HPQ) shares are reeling after the computer-maker reported earnings and said it was taking a $9 billion charge. The write-down is due to accounting irregularities related to its recent acquisition of Autonomy. Shares are taking a hit on the headline, now down $1.36 to $11.94 on heavy turnover of more than 100 million shares; but the options order flow seems to reflect mixed sentiment. In fact, the Weekly 12 calls, which are now six cents out-of-the-money and expiring at the end of this week, are the most actives in HP. 22,118 traded against 696 in open interest. Some investors might be taking positions on the view today’s drop in the stock is an overreaction. However, there isn’t long for the trade to play out. Since the contract expires at the end of the week (11/23) and Thursday is a holiday (Friday is a half day), the Weekly 11/23 contracts only have one and a half trading days of life remaining after today.

Mosaic (NYSE:MOS) sees relative strength and increased options activity Tuesday. The stock is up $1.68 to $52.88 in active trading of 2.2 million shares. Meanwhile, 19,000 calls and 3,300 puts traded on the agricultural chemicals company. December 55 calls, which are now 4 percent out-of-the-money and expiring in 31 days, are the most actives in Mosaic. 5,210 traded. Weekly 52.5, December 57.5 and December 52.5 calls are the next most actives. It’s not clear what is motivating the activity, as there are no headlines on the ticker today.

Bearish Flow
Cigna (NYSE:CI) slips 42 cents to $51.48 and options volume on the health insurance company is running 7.5X the daily average, being driven by a hefty spread in morning trading. In this plain vanilla put spread, the investor apparently bought 11,300 July 50 puts on Cigna for $3.71 per contract and sold 11,300 July 40 puts at 90 cents. The Jul 40 – 50 put spread, for $2.81, appears to be a new position because volume exceeds open interest in both contracts. Cigna shares have been strengthening over the past few days after falling nearly 7 percent in the six days following the Presidential elections. The put spread seems to be a bearish position, possibly to help hedge a stock holding in Cigna, on the views that shares might see additional losses through the first half of 2013.

iShares Corporate Bond ETF (HYG) is up a nickel to $92.13 and options volume on the fund is running 4.5X the daily average, being driven by ratio put spreads. The largest trade is a Dec 89 – 91 (2X1) put ratio spread, in which the investor bought 10,000 December 91 puts for 75 cents and sold 20,000 December 89 puts at 32 cents. The 1X2, for 11 cents, appears to be a bearish play on the ETF through the December expiration and, if so, a bet that corporate bond prices will come under pressure – yields will rise.

Unusual Volume
Hewlett Packard (NYSE:HPQ) options volume is running 4.5X the (22-day) average, with 235,000 contracts traded and call volume accounting for 53 percent of the volume.

Green Mountain Coffee Roasters (NASDAQ:GMCR) options volume is 4X, the average daily, with 133,000 contracts traded and call volume representing 83 percent of the activity.

Teavana (TEA) options volume is running 15.5X the average daily, with 58,000 contracts traded and put volume accounting for 87 percent of the activity.

Increasing options activity is also being seen in Best Buy (NYSE:BBY), Agilent (NYSE:A), and Cigna (NYSE:CI)

Implied Volatility Mover
Implied volatility in the options on Teavana (TEA) is moving higher. As noted in yesterday’s closing wrap, December 15 puts on the tea company saw unusual amounts of activity Monday. The flow seemed unusual because on 11/14 Starbuck’s had made a $15.5 per share cash offer to buy Teavana. Yet, today, TEA is ticking down 47 cents to $14.96 after a negative research piece about the company made the rounds. The story appears to be raising concerns about the buyout and puts on the stock are busy for a second day. About 50,000 puts and 7,600 calls traded on Teavana so far and 30-day implied volatilities are moving up 14 percent to 21.5.

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