Hot Option Plays: Challenging The Upside After Hours

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Cusick’s Corner 12-17-2012 After Hours
The bid bit early today and held into the close, with the major indices holding their best levels into the After Hours. I would have liked to see a little more of a challenge to the downside earlier just so we could have washed out some of the weaker hands to the upside but this was constructive action today to the upside. There were a number of stocks that had some strong volume and are through some notable resistance, C/GS/GOOG/XLF being some examples. I like the leadership that Finance, XLF, is driving and this is a critical offensive sector that will need to lead if we are to have any continued upside. There are some names that were bouncing off long term support, i.e. the 200 day moving average, CAT/IBM/NKE/GLD, and it will be interesting to see if these bounces are sustained in this challenging environment. From the data front watch the NAHB Housing Index due out after the open, this could add some volatility to one of the hottest sectors, Housing, to date. See you Midday.

Stock market averages finished near session highs on hopes for progress in fiscal cliff talks. Some of the optimism was sparked after House Speaker John Boehner expressed flexibility on the subject of taxing high income earners. Beyond that, it was a relatively slow news day on the Street. In economic news, a report on regional manufacturing showed the New York Empire State Index down to -8.1 in December, which was below expectations of +2. The market showed little reaction to the data and stock market averages held higher at the open. Elsewhere, crude oil was up 72 cents to $87.45 and gold ticked $2.2 higher to $1699.2. The Dow Jones Industrial Average was up 80 points midday and built on the gains in the final hour. At the closing bell, the Dow was up 100 points and the NASDAQ had added nearly 40.

Bullish
Bank of America (NYSE:BAC) rallied 4 percent to $11 Monday, new 52-week highs, and helped lead the Dow Jones Industrial Average to a triple digit gain to start the week. The stock finished near its best levels of the day and options on the bank saw brisk trading. 479,000 calls and 213,000 puts traded in BAC today. December 11 calls were the day’s most actively traded equity contract after more than 100,000 changed hands. Dec 11 calls on BAC are now at-the-money and expiring at the end of the week. January 10 and 11 calls were the next most actives in the name. In addition, the stock saw an additional boost in the after hours, up to $11.11 per share, on a CNBC report that a prominent analyst has upgraded some of the financials, including BAC.

Bullish trading was also seen in Taiwan Semiconductor (NYSE:TSM), Orexigen (NASDAQ:OREX), and Delta Airlines (NYSE:DAL).

Bearish
Conagra (NYSE:CAG) saw increased options activity ahead of earnings. The company is due to report results Thursday morning. Shares were up 17 cents to $30.32 and options volume on the food company was 3X the daily average ahead of the news Monday. 6,534 puts and 1,593 calls traded in CAG. Much of the focus was on March 25 puts, where 5,032 contracts traded against 160 in open interest. The largest trade was an 866-lot for 15 cents per contract when the market was 10 to 15 cents per contract. It’s not clear what motivated the activity, as the contract is now 17.5 percent out-of-the-money and CAG has performed well lately, gaining 22.8 percent since July. Some shareholders might have been driving the flow and taking positions in downside March puts to help hedge the recent gains in the underlying.

Bearish trading was also seen in Banco Bradesco (NYSE:BBD), Globe Specialty Metals (GSM), and Procter & Gamble (NYSE:PG).

Index Trading
The S&P 500 Index (.SPX) jumped 16.78 points to 1,430.36 Monday and erased the entire loss suffered Thursday and Friday. Meanwhile, CBOE Volatility Index (.VIX) lost .66 to 16.34. Overall volumes in the index pits were light again, about 611,000 calls and 486,000 puts traded on SPX, VIX and other cash indexes, which is only about 80 percent the daily average volume, according to Trade Alert data. However, we’re likely to see increasing activity later in the week before trading slows again into the holidays. Friday is “Quadruple Witch” expiration, when futures, futures options, and single stock futures will also be expiring along with options.

ETF Action
SPDR Oil and Production Fund (XOP) gained 72 cents to $54.55 and options volume on the ETF was 5X the normal, driven by a hefty three-way spread. The investor apparently sold 25,000 December 50 puts on XOP for a nickel, bought 25,000 Mach 50 puts for $1.60 and sold 25,000 March 45 puts at 60 cents. The activity in the Dec 50 puts, which traded 35000X total, might be closing. Open interest is 84,966 and the contract expires at the end of the week. The March puts appear to be part of an opening Mar 45 – 50 put spread for $1. If so, the investor possibly had a bearish view on the energy names and, while closing out a position in Dec 50 puts at only a nickel per contract, they’re now opening a new bearish play in the March spread.

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