Hot Option Plays: Bonds And Stocks Down After Hours

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Cusick’s Corner 01-03-2013 After Hours
The market was rather tame today and stayed in a tight range, many traders are preparing for the employment data in the morning. Tomorrow’s action is exactly what many bulls wanted to see and could signal a potential pop on the open, especially if there’s a good Non-Farm number but with both bonds and stocks down on the close, there’s mixed potential for the Midday tomorrow. Any strength tomorrow might be met with some selling if there is not a clear catalyst. See you Midday.

After surging Wednesday, the Dow Jones Industrial Average opened a bit lower this morning after the Labor Department reported that jobless claims rose by 10,000 to 372,000 last week. 362,000 was expected. However, separately, ADP reported that the economy added 215K private sector jobs last month, which was significantly better than the 150K that was expected. The spotlight was also on the retailers and a mixed round of December same store sales results. TJX, Ross Stores (NASDAQ:ROST), and Nordstrom (NYSE:JWN) ticked higher in the wake of their results. Limited Brands (NYSE:LTD), Macy’s (NYSE:M), and JC Penney (NYSE:JCP) lost modest ground. At the same time, the automakers – Ford (NYSE:F) and GM -both moved higher on the heels of their monthly auto sales results. Later, market averages slipped a bit further after minutes from the latest FOMC meeting indicated that some Fed members are becoming a bit less enthusiastic about QE bond buyback plans. Treasury bonds faltered on the headline, yields rose. The dollar strengthened and gold took it on the chin. The yellow metal dropped $24 to $1665. Crude gave up modest gains and fell 44 cents to $92.68 per barrel. On Wall Street, the Dow gave back 22 of yesterday’s 303 point surge. The NASDAQ dropped 11.7 points.

Bullish
Ford Motor (NYSE:F) saw a flurry of activity after the automaker reported a 5 percent increase in December auto sales. The stock gained 26 cents to $13.46 on high turnover of 120 million shares. On the options front, an impressive half million contracts traded on Ford. 355,000 calls and 149,000 puts. January 12.5 calls, which are now almost $1 in-the-money and expiring in a little more than two weeks, were the most actives. Nearly 55,000 contracts traded. Weekly (1/11) 14 calls, February 13 calls, January 14 calls, and January[2014] 15 calls were the next most actives in Ford today and implied volatility fell 8 percent to 31.

Bullish trading was also seen in Iron Mountain (NYSE:IRM), GM, and Trina Solar (NYSE:TSL).

Bearish
US Airways (NYSE:LCC) dropped 32 cents to $13.66 Thursday, but is up more than 170 percent from a year ago when the stock fetched less than $5 in early-January 2011. On the options front, trading in the airliner was relatively active today. About 14,000 puts and 3,000 calls traded on the stock. One player was buying up to 10,000 February 12 puts on US Airways for up to 42 cents per contract, according to a source on the exchange floor. Open interest at that line is only 218 contracts. There were no headlines on the stock today. Some shareholders might be taking positions in puts to hedge the risk of losses should shares lose altitude heading into earnings, due around Jan 23.

Bearish trading was also seen in Mattel (NYSE:MAT), Fortinet (FTNT), and Riverbed Tech (NASDAQ:RVBD).

Index Trading
CBOE Volatility Index (.VIX) saw a rather quiet day after a big two-day drop. The market’s “fear gauge”, which tracks the expected or implied volatility priced into S&P 500 Index options, suffered a two-day 35.4 percent drop Monday and Wednesday. The volatility index lost another .12 to 14.56 today. In options action, trading remains very busy in the VIX pit. 475,000 calls and 377,000 puts traded on the index today. February $14 and 17 puts were the most actively traded options in VIX options today. Meanwhile, the S&P 500 lost 3.05 points to 1,459.37 and it was a busy day in the SPX pit as well. 420,000 calls and 508,000 puts traded on the S&P. January 1,475 and 1,450 calls were the day’s most actives.

ETF Action
A huge four-way spread traded in the iShares Small Cap Fund (IWM) Thursday. Shares notched 52-week highs intraday, but lost 20 cents to $86.60 on the session. Meanwhile, one player in the options market bought 50,000 Feb 80 puts on IWM and sold 150,000 Feb 75 puts. The 1X3 traded for 2 cents and is possibly a closing trade. The same investor sold 30,000 April 84 puts on IWM and bought 90,000 April 78 puts. The 1X3 traded at $1.03 and appears to be a new spread (volume exceeds open interest). So, the four-way probably rolls a 1X3 put ratio [[back]] spread out from February to April. This advanced options play seems to be a view that one of two things might happen: either 1) IWM will hold above $84 through the April expiration or, if not, 2) shares will see a substantial decline between now and then. It might be part of a hedging strategy against a portfolio of small capitalization stocks.

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