Hot Option Plays: Longs Appear Buoyant Amid Fiscal Cliff Rhetoric After Hours

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Cusick’s Corner 11-29-2012 After Hours
I guess it was Nancy’s turn to challenge the markets. But in all seriousness, it’s impressive to see the buoyancy of the longs in this market with all the rhetoric of the “fiscal cliff”. What has been notable is that neither Volatility (VIX) nor Small Caps (IWM) have shown fear or uncertainty on the domestic economic front. There was notable strength in Metals like Copper and Silver, JJC/SLV, and an uptick in Tech, more specifically in Networking and Hardware, IGN. There has been weakness in the Retail segment, XRT, with sales numbers underperforming expectations. There could be some residual effects from the storms on the east coast but there seems to be some trimming of profits in some of these sectors names, KSS/TIF/ARO. This action also heightens the pre-market data due out tomorrow for Personal Income and Spending as well as the PMI due out after the open. See you Midday.

Stock market averages finished higher Thursday. On the economic front, a report released early showed third quarter GDP up to an annual rate of 2.7 percent, from an initial reading of 2.0 percent, but below expectations of 2.8 percent. Meanwhile, the Labor Department said that jobless claims declined to 393K last week, from 416K and better than the 395K that was expected. Lastly, October Pending Home Sales surprised to the upside and improved 5.2 percent, much better than the 1 percent that was expected. Stock market averages were able to build on Wednesday’s gains with help from the data. Strength in overseas markets, including 1 percent gains in Hong Kong’s Hang Seng and Tokyo’s Nikkei, as well as solid advances across most Eurozone markets, seemed to bolster early sentiment as well. Crude oil rose $1.30 to $87.70 and gold added 8.5 to $1725. However, the Dow Jones Industrial Average moved off session highs midday and pared its gains after House Speaker John Boehner said no progress was being made and that the US is in “real danger of going off the fiscal cliff.” The Dow Jones Industrial Average surrendered its morning gains and was flat at mid-session, before bouncing in afternoon trading and adding 37 points on the day. The NASDAQ added 20.

Bullish
Options on Ford Motor (NYSE:F) were active Thursday. The stock gained 28 cents to $11.53 in relatively brisk trading of 56 million shares and is now up 15.3 percent in a little more than a month. On the options front, 144,000 calls and 53,000 puts traded on the automaker Thursday. December 12 calls were the most actives after more than 30,000 contracts changed hands. Some of the largest blocks traded in morning action for 9 cents per contract when the market was 7 to 9 cents. December 12 calls on Ford are now 4.1 percent out-of-the-money and some investors were possibly taking positions in the contract on hopes the stock will roll higher through the company’s auto and truck sales update on Monday. January 11 and February 12 calls on Ford were very busy today as well.

Bullish trading was also seen in Goodyear Tire (NYSE:GT), Dollar General (DG), and Omnivision Technology (NASDAQ:OVTI).

Bearish
Supervalu (NYSE:SVU) drops 52 cents to $2.28 in heavy trading of 17.5 million shares after Reuters reported that talks between the grocery chain and Cerberus about a sale of the company have stalled. The stock fell sharply in afternoon trading on the heels of the report and options volume on the stock jumped to 6.5X the daily average. 45,000 calls and 23,000 puts traded in SVU. December 3 calls were the most actives and the flow included a 6900-lot at a nickel per contract when the market was 5 to 10 cents. Open interest in the Dec 3 calls on SVU is 45,393 and the largest block of OI in the name. Some investors might have been liquidating bullish positions (selling-to-close) on the heels of the seemingly disappointing headline.

Bearish trading was also seen in Frontier Communications (NYSE:FTR), Cemex (NYSE:CX), and Herbalife (NYSE:HLF).

Index Trading
CBOE Volatility Index (.VIX) slipped another .45 to 15.06 after the S&P 500 (.SPX) added 6.02 points to 1,415.95. Despite all of the media focus and political wrangling surrounding the “fiscal cliff”, there’s been relatively little movement in the VIX this week and also light volumes in the index market. 234,000 calls and 387,000 puts traded on the S&P 500 Index today, which is only 80 percent of the recent daily average volume, according to Trade Alert data. Low SPX put volume and falling VIX are not consistent with any significant hedging activity. Instead, volumes and volatility tend to spike when portfolio managers are worried about the short-term market outlook and buy downside SPX puts as portfolio insurance. Despite the media hype, there seems to be no real fear about the fiscal cliff among index traders.

ETF Action
The largest blocks of options traded Thursday surfaced in afternoon action on the iShares Japan Fund (EWJ). Shares gained 11 cents to $9.36 on a day of modest strength across Asia’s equity markets and a block of 250,000 March 10 calls traded on EWJ for 11 cents per contract when the market was 10 to 11 cents. The trade printed about a half hour before the closing bell. About thirty minutes earlier, a 55000-contract blocks of March 10 calls traded on EWJ for 9 cents when the market was 8 to 9 cents. At the end of the day, an impressive 306,000 contracts traded against 32,000 in open interest. The March 10 call on EWJ is 6.8 percent out-of-the-money and, if a buyer initiated the trades, the flow seems to reflect a very bullish view on Japan’s equity markets.

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