Hot Option Plays: Taking A Bite Out Of Apple Midday

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Cusick’s Corner 01-15-2013 Midday
Tech traders have been taking a bite out of Apple (NASDAQ:AAPL), breaking $500, which has weighed on the suppliers to the big tech giant, most notably Broadcom (NASDAQ:BRCM) & Skyworks (NASDAQ:SWKS). This action has tech under pressure in general, down about .40%, but there is a bid that has been stabilizing the market. JPM is reporting tonight and since WFC kicked off the banks earnings with an in-line, it will be very interesting to see how the market reacts if Chase has an in-line or mixed report. Right now the market is pricing a potential Estimated Move of ~1.16 going into the event (I used the Jan options). Facebook headlines on new “Graph Search” have the stock pulling back and popping Google, looks like the search on FB does not use net, just FB universe. Will keep an eye on that going into the close, see you After Hours.

Stock market averages are lower following a round of mixed economic news Tuesday. A report released early showed Retail Sales up .5 percent in December, which was .3 percent better than expected. Separately, the Producer Price Index [PPI] fell .2 percent in December. No change was expected. A third report on regional manufacturing was the NY Empire State Index falling to -7.8 in January and well below expectations of 2.0. Treasury bonds strengthened on the data and pre-earnings jitters is probably a factor affecting sentiment in the equity market ahead of key results from the banking sector over the next few days and GE reporting Friday. Of course, a lot of focus remains on Apple Computer (NASDAQ:AAPL), which has continued its fall and dipped below the $500 level in active trading after Nomura Securities slashed its price target on the stock. AAPL is now down $15.09 to $486.66. Elsewhere, Asia’s equity markets were mixed and European stock market averages are trading mostly lower. The euro is giving back some of its recent gains and is down .3 percent to 1.334 against the dollar. Crude oil dropped 27 cents to $93.87 per barrel, but gold is up $13 to $1682.5. On Wall Street, the Dow Jones Industrial Average slipped at the open and is down 17 points midday. The NASDAQ lost 14. CBOE Volatility Index (.VIX) is up .17 to 13.69. Overall trading in the options market is active and likely to pick up later in the week due to the expiration, with about 3.5 million calls and 2.8 million puts traded through 11:30am ET.

Bullish Flow
Morgan Stanley (NYSE:MS) is seeing active trading ahead of earnings later this week. The investment bank is due to release its results Friday morning. The stock is up 22 cents to $20.29 in relatively active trading of 11 million Tuesday. Options volume includes 27,000 calls and 13,000 puts, a ratio of more than two-to-one. January 20.5 calls on MS are 21 cents out-of-the-money and will have one trading day of life remaining after the company releases its results. 11,100 contracts traded against 1,973 in open interest. January 20 calls are the second most active in MS. 8,750 contracts changed hands. Shares lost 3.8 percent on 10/18 when the company last reported earnings, but have rallied 14 percent since that time. The interest in near-the-money January calls on the stock might reflect expectations for good news when the company reports at the end of the week.

Spectra Energy (NYSE:SE), a natural gas company, is down 15 cents to $27.54 and options volume on the stock is 3.5X the daily average after 14,000 calls and 720 puts traded on the ticker. Most of the flow is in January 28 calls on the stock, as 12,730 contracts traded against 9,405 in open interest. The largest trade is a 9,950-lot for 7 cents per contract. The activity is somewhat unusual because the contract is 46 cents out-of-the-money and expiring in just a few days. The company hosts an analyst meeting tomorrow.

Bearish Flow
Large blocks of puts traded in three of the nine Select Sector funds Tuesday. These nine funds collectively hold the five hundred stocks from the S&P 500. SPDR Financials (XLF), for instance, is flat at $17.06 and one investor bought 35,000 April 16 puts on the ETF for 29 cents per contract, according to a source on the exchange floor. Separately, 53,000 February 34 puts traded on SPDR Basic Materials Fund (XLB) for a nickel per contract. Shares are up 3 cents to $39.05. And, a 52000-contract block of February 35 puts traded on SPDR Basic Materials Fund (XLB) for 5 cents per contract. Shares are up 4 cents to $39.28. An investor with a large stock portfolio possibly initiated these trades as a short-term hedge.

Wellcare Healthplans (NYSE:WCG) drops 56 cents to $45.99 and options volume on the managed healthcare company is running 6.5X the daily average. 6,400 puts and only 28 calls traded on the stock today. February 40 puts are the most actives in the name, as 5,099 traded against 286 in open interest. The top trade is a 1930-lot for 70 cents per contract when the market was 60 to 70 cents. Jan and Feb 45 puts on WCG are seeing interest today as well. It’s not clear what is motivating the activity, as there are no obvious headlines on the stock to explain the increased interest. Earnings are due mid-Feb.

Unusual Volume
DELL options volume is running 5.5X the (22-day) average, with 134,000 contracts traded and call volume accounting for 63 percent of the volume.

SPDR Basic Materials Fund (XLB) options volume is 4X, the average daily, with 62,000 contracts traded and put volume representing 99 percent of the activity.

SPDR Industrials Fund (XLI) options volume is running 3.5X the average daily, with 58,000 contracts traded and put volume accounting for 98 percent of the activity.

Increasing options activity is also being seen in Big Lots (NYSE:BIG), TJX, and Lennar (NYSE:LEN).

Implied Volatility Mover
Implied volatility in the options on Kinross Gold (NYSE:KGC) is moving higher amid active trading in the options on the gold miner today. Shares are up 24 cents to $9.68 and options volume is running 10X the daily average. 52,000 calls and 3,020 puts traded on the stock so far. The flow is heavily concentrated in the Feb 9 calls on KGC, which are 68 cents in-the-money and expiring in 31 days. 34,209 traded against 1,694 in open interest. February 10 calls on the stock are seeing brisk trading as well and 30-day implied volatility in KGC options is up 15 percent to 41.5.

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