Hot Option Plays: Stocks End Flat On Light Volume After Hours

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Cusick’s Corner 11-20-2012
Let’s be frank here, it is a holiday market and the media outlets are taking whatever they can get to keep us engaged. They tried to twist the Fed Chief’s comments about the impending “cliff” but it was more of a déjà vu moment — look back in his September comments. With the current impasse in the tensions surrounding Gaza, all the media has left is the situation in Greece, which at the bare minimum will give the talking heads something to discuss in the morning. At this stage the volume is light and will only get lighter as the week goes on, so trade should be focused and small. By the way, we are just going to have the Midday tomorrow and then go dark for the rest of the week.

Stock market averages traded lower through midday, remaining under water through most of late-Tuesday only to rebound and close almost unchanged. The economic news was a bit better-than-expected after a report released before the opening bell showed Housing Starts improving to an 894K annual rate in October, from 863K in September and much better than the 840K that was predicted by economists. 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 lost 12 percent in the wake of its earnings report after the company also disclosed a $9 billion charge due to an accounting irregularity. HP is one of 18 Dow stocks trading lower and the industrial average has given back 7 of yesterday’s 208-point surge. Crude oil is off $2.15 to $87.13 on talk of a possible cease fire in Gaza. Gold gave up $7.5 to $1727. Data on jobless claims, consumer sentiment, and the leading indicators wrap up this week’s economic calendar before market’s close Thursday for Thanksgiving and re-open for only a half day Friday.

Bullish
Options on Research In Motion (NASDAQ:RIMM) are busy for a second day. 95,000 calls and 42,000 puts traded on the Blackberry-maker Monday, which is 2.5X the daily average volume. The stock closed up 12 cents to $9.70 today in brisk trading of over 97 million shares on the heels of an analyst upgrade. Options volume is again 2.5X the daily average. More than 150,000 options traded on RIM, including 113,000 calls and 39,000 puts. Some players seem to be anticipating additional gains later this week, as the Weekly (expiring 11/23) $10 calls are the most actives in the name today. 18,354 traded against 10,633 in open interest. If the stock holds below $10 through the end of business Friday, the contract expires worthless. In addition, since Thursday is a holiday and Friday only a half day, there are now just one and a half trading days until the weekly 11/23 contracts expire.

Bullish trading was also seen in Mosaic (NYSE:MOS), Green Mountain Coffee Roasters (NASDAQ:GMCR), and Informatica (NASDAQ:INFA).

Bearish
JC Penney (NYSE:JCP), which had a one-month 42.4 percent loss on concerns about the retailer’s slowing sales heading into the pivotal holiday shopping season, closed up 49 cents to $17.49 in active trading of more than 15 million shares Tuesday. Meanwhile, 34,000 calls and 31,000 puts have traded on the stock. While some investors are possibly taking positions on hopes for a rebound in JCP heading into Black Friday sales (Dec 20 calls and Weekly 17.5 calls are among the most actives in the name), the top trade in the options on the stock today is a 10,000-contract block of January 2014 puts at the $10 strike for $1.39 per contract on the International Securities Exchange. An investor bought the deep out-of-the-money [DOOM] puts, to open a new position, according to data from the exchange. If so, the activity seems to reflect concerns that JCP might drop to less than $10 by early-2014.

Bearish trading was also seen in Teavana (TEA), Cigna (NYSE:CI), and International Game Technology (NYSE:IGT).

Index Trading
CBOE Volatility Index (.VIX) ticked down .16 to finish 15.08 and trading was active in the VIX pit due to the expiration. November 2012 options on the index cease trading today before a settlement value is computed Wednesday morning. 240,000 calls and 332,000 puts have traded on the index. November 18, 15, and 16 puts are the most actives. Some investors are probably closing out some positions on uncertainty regarding tomorrow’s settlement print. Open interest in VIX November options is whopping 3.24 million contracts. Of that, an impressive 2.21 million contracts (or 68.2%) are out-of-the-money calls with a strike price greater than 16. All of those (which are not offset today) will expire worthless if the settlement is less than 16.

ETF Action
SPDR Retail Trust (XRT) lost 15 cents to finish $61.70. Earlier today an investor initiated a hefty four-way spread on the exchange-traded fund. They sold 25,000 December 60 puts on XRT at 83 cents, bought 25,000 December 56 puts for 17 cents, bought 25,000 January 62 puts for $2.34 and sold 25,000 January 58 puts at 81 cents. In other words, they sold the Dec 56 – 60 put spreads on XRT at 66 cents and bought the Jan 58 – 62 put spread for $1.53. They paid a net debit of 87 cents for the four-way and were probably closing out a position in the December contracts, while opening a new bearish play in January. If so, they’re extending a bearish view on the retail sector and possibly looking for the group to come under pressure through Black Friday and the holiday shopping season.

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