Hot Option Plays: Playing Small Ball Midday

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Cusick’s Corner 11-30-2012 Midday
This is a similar to the trading action of yesterday, tough to trade. The market is surprisingly buoyant, but this is also a statement that traders are not taking the dueling from the Hill that seriously. Now I do think that the buoyancy at this stage could come under pressure. The market is a level where there is quite a bit of resistance, levels that have been problematic since October. At this stage, if you are planning your trades, trade small and very disciplined. See you After Hours.

Stock market averages slumped in uninspired action on the final day of trading for November 2012. Economic data was mostly disappointing after October Personal Incomes were unchanged and Spending dropped .2 percent. Economists were expecting a .2 percent uptick in Incomes and a .1 percent increase in Spending. Meanwhile, Chicago PMI, a gauge of regional manufacturing activity, printed at 50.4 for November, from 49.9 last month and below expectations of 50.4. Elsewhere, trading was orderly across most Asian and European equity markets. The euro is back at 1.30 against the buck on a relatively quiet week for the currency pair. Crude oil added 50 cents to $88.57, but gold lost $12.5 to $1717. On Wall Street, trading has been choppy throughout most of the week and the trend persists today amid ongoing anxiety about the “fiscal cliff” facing leaders in Washington. End-of-month position squaring is probably driving some of the action as well. The Dow Jones Industrial Average is down 19 points and the tech-heavy NASDAQ dropped 10. CBOE Volatility Index (.VIX) is up .77 to 15.83 amid slowing activity in the options market, with about 2.6 million calls and 2.8 million puts traded across the exchanges through 11:30am ET.

Bullish Flow
Zynga (ZNGA) shares dropped 18 cents to $2.44 on reports the company’s partnership with Facebook has been revised. Under the terms, Facebook can now launch its own products that will compete with Zynga, which makes games like Farmville that are used on Facebook. The stock tumbled in after hours on the news Thursday and has been attempting to rebound in morning action Friday. Trading in the options on Zynga is very busy, with about 35,000 calls and 11,000 puts traded on the ticker. Weekly 2.5 calls, which expire after today, are the most actives. More than 17,000 traded against 3,847 in open interest. Some players might be buying these very short-term options on the view today’s decline is an overreaction. Others are possibly selling the upside calls on expectations the stock will remain under pressure throughout the remainder of the session. If the stock settles at $2.50 or less at the close today, the Weekly 2.5 calls (that expire 11/30) will expire worthless. January 2.5 calls are the second most actives in ZNGA today. 7,680 contracts traded.

Walter Energy (NYSE:WLT), a coal producer, is hot today. Shares are up $1.52 to $30.07 in active trading of 3.3 million shares. On the options front, volume is running 2.5X the daily average. About 23,000 calls and 1,500 puts already traded in WLT. December 32.5 calls on the stock, which are now 7.8 percent out-of-the-money and expiring in three weeks, are the most actives. 5,228 traded. Weekly and December 30 calls are busy as well. No news on the ticker to explain the heightened call activity in WLT today. Shares have underperformed in 2012, falling more than 50 percent year-to-date.

Bearish Flow
Yum Brands (NYSE:YUM) has come under fire after the company released updated guidance after the close of trading Thursday. The news prompted at least three different analysts to downgrade the stock Friday morning. YUM, which had notched 52-week highs of $74.75 yesterday prior to the news, tumbled 9.3 percent to $67.50 through midday Friday. In options action, volume is running 7X the daily average. 12,000 calls and 25,000 puts traded on Yum Brands so far. December 65, 72.5, 75, 70, and 67.5 puts are the five most actives in the name.

Forest Labs (NYSE:FRX) adds 62 cents to $35.20 after analysts at one firm upgraded the stock to Buy today. Not all investors seem to agree, as about 4,000 puts and 380 calls traded in FRX today – 7X the daily average for the pharmaceutical company. February 32 puts are the most actives. 3,000 traded. Another 900 February 35 puts also changed hands. The stock is on an 11-day 9.8 percent winning streak. Some investors might be buying February puts to help hedge or protect the recent gains in the weeks/months ahead.

Unusual Volume
Verisign (NASDAQ:VRSN) options volume is running 4.5X the (22-day) average, with 76,000 contracts traded and put volume accounting for 55 percent of the volume.

Zynga (ZNGA) options volume is 2.5X, the average daily, with 47,000 contracts traded and call volume representing 75 percent of the activity.

Élan (NYSE:ELN) options volume is running 30X the average daily, with 45,000 contracts traded and put volume accounting for 94 percent of the activity.

Increasing options activity is also being seen in TEVA, Decker Outdoor (NASDAQ:DECK) and Yum Brands (NYSE:YUM).

Implied Volatility Mover
Starbucks (NASDAQ:SBUX) is down and implied volatility in the options on stock is moving higher amid relatively active trading Friday. Shares lost 48 cents to $51.32 after a 12.9 percent month-to-date advance since 10/31. Most of the gains were recorded on the second day of November, when shares jumped 9 percent in the wake of its earnings report. Investors in the options market are now jockeying for position in anticipation of Starbucks’ next move. About 14,000 calls and 16,000 puts traded on the ticker. Typical volume through midday (puts and calls) is about 15,000. December 50 puts are the most actives, with more than 8,300 traded. Weekly (12/7) 52.5 calls and 50 puts are busy as well and implied volatility in SBUX options is up 14 percent to 27.

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