Hot Option Plays: Monitoring Copper Moves After Hours

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Cusick’s Corner 01-28-2013 After Hours
The larger bullish picture is still in play but the Materials segment, XLB, might be the wet blanket in the short-term. A catalyst for the negative action could be the disappointing Housing, Pending Sales down, and as I mentioned early this month, the proverbial canary in the coalmine, Copper, JJC, has not been participating in this broad-based rally. If demand for Copper is flat or decreasing this could lead to economic concern. Also the S&Ps have been correlated in a positive manner with Copper so that is another reason that I watch this relationship and action. Watch the Consumer Confidence number after the open tomorrow, a negative number could be a flag of potential waning of business and consumer spending. See you Midday.

Stock market averages finished mixed as a poor reading on Pending Home Sales seemed to offset a stronger-than-expected report on Durable Goods Monday. Market averages opened steady after data released today showed Durable Goods up a surprisingly strong 4.6 percent for December. A 1.6 percent increase was expected. However, any rally attempts stalled after Pending Home Sales, released later, were down 4.3 percent last month and below expectations of 0 percent. Trading then remained cautious heading into a busy week of earnings and economic news. Key stats are due out throughout the week, including an FOMC policy announcement Wednesday and a monthly jobs report Friday. In stock news, Caterpillar (NYSE:CAT) was up 2 percent and the best gainer in the Dow in the wake of its earnings report. Yahoo (NASDAQ:YHOO), Steel Dynamics (NASDAQ:STLD), and Seagate Tech (NASDAQ:STX) are among the companies reporting after the close. Ford (NYSE:F), International Paper (NYSE:IP), and Pfizer (NYSE:PFE) are among a host of companies due to report tomorrow morning. Elsewhere, Shanghai’s Composite was a strong performer, gaining 2.4 percent overnight, but trading was mostly mixed throughout much of Asia and Europe’s equity markets. Crude was up 63 cents to $96.51, but gold lost $1.5 to $1655. On Wall Street, the Dow Jones Industrial Average finished down 14 points, but the NASDAQ added 4.6.

Bullish
Radioshack (NYSE:RSH) has seen an impressive rally over the past two days. The stock was up 58 cents, or 22 percent, to $3.22 today on heavy turnover of 14 million shares. By way of comparison, average daily volume over the past month has been under 3 million. RSH is on a two-day 39.4 percent surge, but there are no obvious headlines to explain the big increase. Investors in the options market seemed to take note Monday, however. 13,000 calls and 6,100 puts traded on the electronic retailer which is 7X the daily average. February, March and April 3 calls were the most actives and 30-day implied volatility in options on Radioshack was up 1.5 percent to 70, up about 7 percent in the past two days.

Bullish trading was also seen in Regions Financial (NYSE:RF), Zynga (ZNGA), and Bed, Bath, Beyond (NASDAQ:BBBY).

Bearish
Petsmart (NASDAQ:PETM) dropped $6.36 to $63.63 on heavy volume of 7.3 million shares following an analyst downgrade Monday. Average daily volume is only about 750,000 shares. At the same time, options volume rose to more than 30X the daily average which was about 15,000 puts and 3,850 calls. The top trade was a spread, in which the investor apparently bought 500 March 65 puts on PETM for $3.20 and sold 500 March 60 puts at $1.10. The stock was around $64.20 at the time and the spread traded for $2.1. Earlier, when shares were closer to $65.50, the same spread traded for $1.65, 488X. At the end of the day, both the March 60 and March 65 puts on PETM traded more than 4,800 contracts, as one or more investors might have been building a position in the spread throughout the course of the trading day. If so, they’re possibly bracing for additional losses in Petsmart shares heading into earnings, due out late-February.

Bearish trading was also seen in Herbalife (NYSE:HLF), 3D Systems (DDD), and Nuskin (NYSE:NUS).

Index Trading
Overall action in the index market was very light Monday, as trading was range-bound and seemed to lack any real conviction. The S&P 500 Index (.SPX) traded in a narrow 7-point range and lost 2.78 to 1,500.18. Meanwhile, CBOE Volatility Index (.VIX), which tracks the expected or implied volatility priced into SPX options, added .68 to 13.57. On the options front, 452,000 calls and 490,000 puts traded on the S&P 500, VIX and other cash index products, which is only 60 percent of the recent daily average volume, according to Trade Alert data. Volumes might pick up later in the week, however, when macro players react to headlines related to the Fed’s rate meeting Wednesday and key data like Friday’s employment report.

ETF Action
The largest blocks of options traded Friday were in the iShares Emerging Markets Fund (EEM). Shares drifted 31 cents lower to $43.85 and a block of 173,000 April 42.5 puts traded on the ETF for 87 cents per contract when the market was 85 to 87 cents. At the same time, an 111,429-contract block of December 51 calls traded on EEM at 61 cents when the market was 61 to 65 cents. Both blocks appear to be new positions because volume was greater than open interest. If so, the position might be bearish risk-reversal (selling calls to buy puts) or maybe a hedge [[collar]] designed to help protect an international portfolio of shares of companies from emerging or developing economies.

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