Hot Option Plays: Are Things Really Improving? Midday

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Cusick’s Corner 01-23-2012 Midday
The market is in no mood to take an “Average Joe” out to the woodshed after what some would consider flat to mixed earnings results. We are seeing solid earnings numbers but misses on the revs, and there is no discussion or negative action whatsoever. So you might say that earnings are not on the driver this part of the cycle, rather it’s more global growth and there’s a lot of cash on the sidelines that needs to be put to work. This makes it hard to challenge the upside but there are two markets that I am watching that may be a good tell that volatility could potentially arise, Bonds, TLT, and Copper, JJC. Bonds on the long-end, 20+ years, have been grinding to the upside; a challenge would be needed to help potentially catalyze the equity bulls. Copper has been unable to break out of the 12 month down trend, failing right at resistance. A break of resistance, ~$47 on JJC, will be needed if this global expansion assumption is going to get more teeth. See you After Hours.

Market action is mixed, with earnings news keeping market averages above water through midday Wednesday. IBM is up 5 percent to $205.84 and helping the price-weighted Dow Jones Industrial Average to a 53-point on the heels of its earnings report card. Google (NASDAQ:GOOG) and Intuitive Surgical (NASDAQ:ISRG) are also seeing post-earnings strength and helping to lift the NASDAQ 8.5 points higher. However, the S&P 500 is down .61 points to 1491.95 and the overall action can be characterized as “mixed”, with not much economic news to drive the market one way or the other. On the housing front, November home prices rose 5.6 percent from a year ago. Overseas and commodities markets were mixed in quiet trading. Crude oil is off 25 cents to $96.42 a barrel and gold lost $5 to $1688 per Troy Ounce. Attention is also on the House of Representatives, where a vote on extending the debt ceiling until May is taking place Wednesday. CBOE Volatility Index (.VIX) is down .08 to 12.35. Overall trading in the options market is running about the typical levels, with 4 million calls and 3.7 million puts traded through 12:00pm ET.

Bullish Flow
Safeway (NYSE:SWY) rallied $1.17 to $20 in heavy trading of 11.8 million shares on reports Montreal’s Metro might be interest in the grocery chain’s Canadian operations. The stock is rallying and options volume is running 8.5X the daily average. 47,000 calls and 5,400 puts have traded in Safeway so far. March 21 calls, which are now $1, or 5 percent, out-of-the-money and expiring in 51 days, are the most active in SWY. 17,530 contracts changed hands. March 20, Feb 20 and March 19 calls are the next most actives and implied volatility in SWY options is up 11.5 percent to 30.5.

US Airways (NYSE:LCC) is up 71 cents to $15.56 and moving to new 52-week highs this morning on the heels of the airliner’s latest profit report. The company reported a 26-cent per share quarterly profit, which was 6 cents better than expectations. On the options front, 23,000 calls and 5,025 puts traded on the stock. February 17 calls, which are now 9.3 percent out-of-the-money and expiring in three and a half weeks, are the most active in LCC. 10,540 traded. March 15 and March 17 calls are the next most actives and 30-day implied volatility in the options on the stock fell 14.5 percent to 43.5, new 52-week lows.

Bearish Flow
Mattel (NYSE:MAT) drops 42 cents to $37.74 on relatively light volume of 835,000 shares. Yet, options volume is running at 5X the typical pace. 7,540 puts and 1,190 calls traded on the toy and game-maker so far. February 37 puts are the most actives. 3,566 contracts changed hands. Another 3,160 of the February 38 puts also traded in Mattel today. 30-day implied volatility is moving up 21 percent to 31. The increased activity comes ahead of Mattel’s February 1 earnings report and annual analyst meeting on February 8.

The largest options trade so far today is in the iShares Emerging Markets Fund (EEM). Shares are off 29 cents to $44.41 and a 79,400-contract block of March 44 puts traded on the ETF for 82 cents per contract. A customer bought the block of downside puts and appears to be opening a new position. 85,000 contracts now traded against 45,000 in open interest. The hefty premium purchase comes as implied volatility in EEM options, as measured by the VXEEM index, moves up .09 to 16.33; but remains not far from the lows of 15.85 set Friday.

Unusual Volume
IBM options volume is running 3X the (22-day) average, with 111,000 contracts traded and call volume accounting for 65 percent of the volume.

O Reilly Automotive (NASDAQ:ORLY) options volume is 46X, the average daily, with 80,000 contracts traded and call volume representing 85 percent of the activity.

SPDR Oil and Production Fund (XOP) options volume is running 10X the average daily, with 65,000 contracts traded and put volume accounting for 98 percent of the activity.

Increasing options activity is also being seen in CREE, Safeway (NYSE:SWY), and Melco Crown Entertainment (NASDAQ:MPEL).

Implied Volatility Mover
Implied volatility in the options on Cyberonics (NASDAQ:CYBX) is moving higher Wednesday. The stock is down $4.29 to $43.81 in active trading of 2.9 million shares, but with no company headlines to explain the volatility in the Houston, TX medical instruments company. On the options front, 9,065 puts and 250 calls traded in CYBX so far. July 40 and 45 puts are the most actives, being driven by spread trading, and implied volatility in the options on the stock is up 27 percent to 55.5

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