Hot Option Plays: Cliff Looms And Volatility On The Rise Midday

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Cusick’s Corner 12-28-2012 Midday
With all the fiscal cliff deals and mini deals out there, it is difficult to put any commentary together that will mean a hill of beans except simply use common sense. At this point we have not seen much volume and the most recent volatility has now put the realization that the longs are not budging, cliff or no cliff, until there is definitive news out of DC. This could be one of those classic go long the rumor, i.e. some sort of fiscal deal gets done leading to some euphoric move. Then after a great New Year’s party, the hangover kicks in, in other words reality. So if you are trading now, consider trading small and keeping powder dry. One sector that is on the radar is Metals, specifically Silver; pressure could build in this precious metal. See you After Hours.

Stock market averages fell again Friday, as fiscal cliff concerns continue to overshadow other financial news. On the economic front, data showed Pending Home Sales up 1.7 percent in November, which was .7 percent better-than-expected. Chicago PMI, a gauge of regional manufacturing activity, rose to 51.6 in December, from 50.4 and better than the 51.0 that had been predicted by economists. The data had minimal market impact. Instead, investors are waiting to see if President Obama and top lawmakers can make a last ditch effort to reach a deal and avoid stepping over the cliff. Elsewhere, market averages were steady in Asia, but are broadly lower across the Eurozone. Crude oil is up 11 cents to $90.98, but gold lost $6.5 to $1657. On Wall Street, the Dow Jones Industrial Average is down 83 points and the NASDAQ dropped 11. CBOE Volatility Index (.VIX) is up .89 to 20.36. Overall options volumes are light with approximately 1.5 million calls and 1.4 million puts traded across the exchanges through 10:30am ET.

Bullish Flow
Pfizer (NYSE:PFE) is off a nickel to $25.09 and one of 27 Dow stocks trading lower heading into midday Friday. Share volume is a relatively light 6.4 million, but options on Pfizer are actively traded. About 15,000 calls and 1,600 puts so far. January 26 calls, which are 3.6 percent out-of-the-money and expiring in three weeks, are the most actives. 7,139 traded, including 4000 for 9 cents per contract when the market was 8 to 9 cents. January 24 and 25 calls on PFE are seeing interest today as well and implied volatility in the options on the stock is up 4 percent to 16.5. It’s not what is driving the increased call activity in the drug-maker today, as there are no obvious company headlines. Earnings are due out late-January and after the Jan 2013 expiration.

Expeditors International of Washington (NASDAQ:EXPD), a Seattle, WA-based shipping company, is up 33 cents to $39.60 and options volume on the stock is running 4X the daily average. 3,250 calls and 165 puts traded on the stock so far. January 40 calls, which are now 40-cents out-of-the-money and expiring in 3 weeks, are the most actives in the name. 2,613 traded, including a 430-lot for 70 cents per contact when the market was 60 to 70 cents. Feb and May 40 calls on EXPD are seeing interest as well, but no recent headlines on the stock to explain the increased activity in upside calls Friday.

Bearish Flow
Home Depot (NYSE:HD) is off 31 cents to $60.76 and among the losers in the Dow today. On the options front, volume is running 3X the normal levels for midday after about 12,000 puts and 7,600 calls traded on the home improvement retailer. The top trades on the stock are in the weekly options that expire 1/4 after an investor sold 985 upside 62.5 calls at 15 cents and bought 985 downside 60 puts for 67 cents. This weekly 60 – 62.5 bearish “risk-reversal” has traded multiple times today and seems to reflect concerns that Home Depot shares might fall next week. It might be related to reports related to a dockworker strike [[Bloomberg]].

Harmony Gold (NYSE:HMY) is down a nickel to $8.59 and options on the stock are busy for a second day. 3,487 calls and only 20 puts traded on the stock. One of the top trades is a 318-lot of May 10 calls at 40 cents per contract on ISE. An investor sold the calls, to open, according to data from the exchange. The same contract saw similar action yesterday and the flow created 4,000 contracts of new open interest. August 10 and 11 calls on HMY are also seeing interest and trading predominantly on the bid as well. So, it appears that call writers are active in the name and seem to see limited upside for shares of the gold miner through the first half of 2013.

Unusual Volume
Market Vectors Junior Gold Miners Fund (GDXJ) options volume is running 2.5X the (22-day) average, with 19,000 contracts traded and call volume accounting for 98 percent of the volume.

SPDR Technology Fund (XLK) options volume is 2X, the average daily, with 33,000 contracts traded and call volume representing 98 percent of the activity.

Expeditors International (NASDAQ:EXPD) options volume is running 4X the average daily, with 3,400 contracts traded and call volume accounting for 95 percent of the activity.

Increasing options activity is also being seen in Harmony Gold (NYSE:HMY), Family Dollar (NYSE:FDO), and MagicJack (NASDAQ:CALL).

Implied Volatility Mover
Implied volatility in the options on Herbalife (NYSE:HLF) is easing, as the stock continues its recent rebound. The stock fell sharply last week and fell to new 52-week lows Monday on news Pershing Square’s Bill Ackman was short the stock. Ackman explained his bearish view on HLF Thursday and, among other things, said he believes the company is a “pyramid scheme”. HLF is up $1.70 today, however, and has rallied 15.1 percent over the past three days. Options on the stock are busy. 21,000 calls and 12,000 puts so far. Meanwhile, 30-day implied volatility in HLF is down 9 percent, but still elevated at 103.

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