Hot Option Plays: New Year, New Market

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Cusick’s Corner 01-02-2013
For those traders who held tight into the New Year, looks like some of you have been potentially rewarded. For some of the cash that has been sidelined, it is rotating into the market. I think this action has played out well, not because our elected officials did part of their job, but they removed a roadblock from the momentum that we have been watching build in the Emerging Countries, EEM. We have also been discussing the moves in Copper, JJC, Steel, and the Transports, IYT, that were all starting to support an argument that we are seeing a cyclical shift from leaders like Tech, QQQ, and into new global growth opportunities. There is weakness in the Euro Currency, FXE, and this is something to keep an eye on but I would not be surprised if we consolidate at these levels. Covered called activity may be picking up at these levels as well. See you After Hours.

Stock market average surged to start the New Year Wednesday. Index futures were sharply higher Tuesday evening on news the House had passed a budget bill to avert the so-called “fiscal cliff”. The bill already had Senate approval and now awaits a signature from President Obama. The other economic news was mixed. ISM Index was up to 50.7 for December, from 49.5 and better than the 50.5 that was expected. However, Construction Spending dropped .3 percent in November. A .5 percent increase was expected. Elsewhere, market averages rallied across most of Europe and Asia. Crude oil prices jumped $1.26 to $93.08 per barrel and gold gained $14.9 to $1690.7. On Wall Street, the Dow Jones Industrial Average opened solidly higher and is up 225 points midday. The NASDAQ rallied more than 65 points. CBOE Volatility Index (.VIX) dropped 2.15 points to 15.67. Overall options volumes are very heavy, with approximately 5.7 million calls and 4.6 million puts traded across the exchanges through 11:35am ET.

Bullish Flow
Hewlett Packard (NYSE:HPQ) is up 5 percent to $14.96 on increasing volume of 26 million shares and the best gainer among thirty Dow stocks moving higher heading into midday Wednesday. Trading in the options on the computer-maker is busy as well. 52,000 calls and 18,000 puts so far. The top trades are part of a spread after 10,000 January 2014 $10 calls traded for $5.48 and 10,000 January 2014 $15 calls traded at $2.33. The spread, for $3.15, traded on the ISE and data from the exchange is reporting an investor bought the spread, to open. If so, it is a bullish position targeting a move higher in H-P shares through 2013. The stock has already rallied 28 percent off the 52-week lows set in late-November.

Smithfield Foods (NYSE:SFD) is trading up 3.5 percent to $22.33 and options action is picking up in the Smithfield, VA meat producer. 2,600 calls and 375 puts have traded on the stock, which is 3X the daily average. Much of the flow is concentrated in February 23 calls, which are about 3 percent out-of-the-money after today’s move in the stock. 2,136 contracts traded against just 91 contracts in open interest. The top trade is a 622-lot for 75 cents per contract when the market was 60 to 75 cents. Interest in SFD February upside calls comes after the stock was upgraded to Outperform from Market Perform at a Wall Street firm Wednesday morning.

Bearish Flow
Ford Motor (NYSE:F) is up another 12 cents to $13.07 and notching new 52-week highs after surging 17.8 percent in a little more than two weeks. Meanwhile, options on the automaker continue to see brisk trading ahead of monthly same store sales numbers, due out Thursday morning. 103,000 calls and 124,000 puts traded in Ford options so far. January 12.5 puts are the most actives. 37,220 contracts changed hands. Weekly $13 puts, expiring 1/4, are the second busiest. More than 25,000 changed hands. Some investors are possibly taking positions in short-term downside puts on Ford to help hedge the recent gains in the stock. That is, they might be taking defensive positions to hedge the risk of a drop in the stock if monthly auto sales results fall short of expectations.

Two of the largest trades today are in the SPDR 500 Trust (SPY) after 25,000 February 144 puts traded on the ETF at the $2.44 asking price and 25,000 February 139 puts mid-market at $1.19. The activity appears to be part of a hefty Feb 139 – 144 put spread for $1.25, 25000X. SPY is up $2.53 to $144.94 and the out-of-the-money put spread is possibly being initiated the on the view the gains won’t last and shares will fall towards $139 or less through the February expiration. It’s possibly part of a hedging strategy against a larger stock portfolio.

Unusual Volume
Agilent (NYSE:A) options volume is running 7.5X the (22-day) average, with 27,000 contracts traded and call volume accounting for 97 percent of the volume.

Western Digital (NYSE:WDC) options volume is 2X, the average daily, with 17,000 contracts traded and call volume representing 90 percent of the activity.

Hess (NYSE:HES) options volume is running 2.5X the average daily, with 17,000 contracts traded and call volume accounting for 62 percent of the activity.

Increasing options activity is also being seen in Pulte Group (NYSE:PHM), International Paper (NYSE:IP), and Dynegy (NYSE:DYN).

Implied Volatility Mover
Implied volatility in the options on Zipcar (ZIP) is down sharply on news Avis Budget has made a $12.25 per share cash offer for the company. The stock is zipping $3.98 per share higher to $12.22 on surging volume of 9.9 million shares and is within three cents of the takeover offer price. Meanwhile, 11,000 calls and 4,400 puts traded on the auto rental company so far. February 12.5 calls and May 10 puts are the most actives, and 30-day implied volatility has plummeted 68 percent to 19.

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