Hot Option Plays: Negotiations Resume Midday

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Cusick’s Corner 12-27-2012 Midday
With negotiations resuming this morning in Washington, the psyche of the investor will be tested as we get closer to the end of the year and the standoff continues. These headlines and some sort of deal or partial deal could make this market very volatile. While it is important to prepare emotionally for any kind of reaction, strategically it is very difficult to put a play together except for staying small and spread off risk where you can. I am keeping an eye on Financials, XLF, and Transports, IYT; they continue to be leaders and weakness in these sectors (especially when they pullback from their highs) and flag potential weakness in the overall market.

Stock market averages are down on renewed “cliff” concerns Thursday. Cautious commentary from Harry Reid helped fan the worries after the Senator warned that there’s not enough time to avoid going over the fiscal cliff. Stock market averages had already drifted lower before the comments made the rounds after the latest Consumer Confidence Index for December sank to 65.1, from 71.5 and well below expectations of 70. On a brighter note, Weekly Jobless Claims were down to 350K for the period ended 12/22, from 362K and much better than the 375K that was expected. Elsewhere, Japan’s Nikkei continues its run higher, gaining another .9 percent, but trading has turned mixed across the Eurozone. Crude oil slipped 12 cents to $90.86 after big gains seen Wednesday and gold lost $1.2 to $1659.5. On Wall Street, the Dow Jones Industrial Average is down 62 points. The NASDAQ dropped 14.5 points. CBOE Volatility Index (.VIX) has recaptured the 20 level and was recently up .68 to 20.16. Overall options volumes are picking up, with approximately 2 million calls and 2 million puts traded across the exchanges through 10:45am ET.

Bullish Flow
Ford Motor (NYSE:F) continues to see a flurry of options activity. February $12, February $13, and January 12.5 calls on the automaker were heavily traded Wednesday. The stock is down 21 cents to $12.58 in active trading of 28 million shares today after the company announced plans for a major investment in six facilities in Southeast Michigan. On the options front, another 76,000 calls and 25,000 puts traded on Ford. February $13 calls are again seeing active trading. More than 18,000 contracts traded. Weekly (1/11) 14 calls, Weekly (12/28) 14 calls, January $14 calls, and January 12.5 calls are the next most actives in Ford today.

Newmont Mining (NYSE:NEM) is up 49 cents to $45.57 and some investors are showing interest in the March 45 calls on the stock today. 7,344 contracts traded against 3,204 in open interest. The flow has been in smaller sizes. The largest is a 300-lot for $2.76 per contract when the market was $2.74 to $2.76. March 50 calls on Newmont are seeing interest as well. 2,675 contracts have changed hands. Total options volume on the gold miner is a lop-sided 16,000 calls and 4,700 puts, but with no obvious headlines on the stock to explain the increased activity.

Bearish Flow
Marvell Technology (NASDAQ:MRVL) loses another 21 cents to $7.19 and falling to new 52-week lows on heavy turnover of 18 million shares after a jury returned a verdict in favor of Carnegie Mellon and against Marvell and other defendants yesterday. The stock came under fire Wednesday afternoon on the headlines and remains under pressure Thursday morning. In options action, about 10,000 calls and 12,000 puts traded on MRVL so far, which is 4X the daily average for the chipmaker. January 7.5 calls are the most actives, with 2,770 traded. January 6, 7.5 and 11 puts are the next most actives in MRVL so far today.

Zynga (ZNGA) is up 2 cents to $2.41 and volume in the January 2.5 calls on the social media company is approaching 11,000 contracts. The top trade is a 2,126-contract block at 10 cents per contract when the market was 10 to 11 cents. Another 1,844 also traded for a dime when the bid-ask was 10 to 12 cents. Open interest in the Jan 2.5 call on ZNGA is 61,845 and the largest block of OI in the name. Some investors are possibly closing out positions or liquidating positions on diminishing hopes for a rally beyond $2.50 through the expiration, which represents a 3.7 percent bump over the next 22 days.

Unusual Volume
Market Vectors Junior Gold Miners Fund (GDXJ) options volume is running 2.5X the (22-day) average, with 20,000 contracts traded and call volume accounting for 98 percent of the volume.

Marvell Technology (NASDAQ:MRVL) options volume is 3X, the average daily, with 19,000 contracts traded and put volume representing 58 percent of the activity.

Foster Wheeler (NASDAQ:FWLT) options volume is running 12X the average daily, with 9,170 contracts traded and call volume accounting for 98 percent of the activity.

Increasing options activity is also being seen in Rite Aid (NYSE:RAD), Forest Oil (NYSE:FST) and KLA Tencor (NASDAQ:KLAC).

Implied Volatility Mover
CBOE Volatility Index (.VIX) is up .79 to 20.27 and recaptured the 20 handle today amid ongoing concerns about the budget challenges facing Congress and the White House. VIX, which tracks the implied volatility priced into S&P 500 Index (.SPX) options, has now rallied 34.5 percent in the past month. Today’s move has stirred up some increasing activity in the VIX trading pit at the Chicago Board Options Exchange. 203,000 calls and 119,000 puts traded on the index so far. January 17 puts and January 25 calls are the most actives.

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