Hot Option Plays: The Trend Is Your Friend Midday

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Cusick’s Corner 01-28-2013 Midday
“The trend is your friend” this morning and that adage has never been truer. Trying to figure out when this run will come to a turning point at this stage is fruitless. Rather than trying to pick tops or read the tea leaves of sentiment, look for small shakeouts and potentially pick up some names that have been working well in this trading environment. The S&Ps are ready to challenge 1500. Mid-term Treasury Yields, the 10 yr, are poised to challenge the 2% level on that beloved (by the media at least) Golden Cross, and the Euro currency, FXE, looks ready to potentially crack $1.35. I am still trading small on pullbacks, not trying to pick tops has been the mode today. See you After Hours.

Market averages opened steady with help from a strong Durable Goods report, but trading is cautious heading into a busy week of earnings and economic news. Key economic stats are due out throughout the week, including an FOMC policy announcement Wednesday and a monthly jobs report Friday. Data released today showed Durable Goods up a surprisingly strong 4.6 percent for December. A 1.6 percent increase was expected. However, Pending Home Sales, released later, were down 4.3 percent last month and below expectations of 0 percent. In stock news, Caterpillar (NYSE:CAT) is up 1.4 percent and one of 11 Dow stocks holding gains 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. 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 is flat at $95.90 and gold gained $1 to $1657.5. On Wall Street, the Dow Jones Industrial Average is down 16 points, but a 2.6 percent advance in Apple (NASDAQ:AAPL) is helping the NASDAQ Composite Index to a 5-point. CBOE Volatility Index (.VIX) is up .76 to 13.65. Overall trading in the options market is active. 3 million calls and 2.5 million puts traded through 11:00am ET.

Bullish Flow
Bed, Bath and Beyond (NASDAQ:BBBY) drops $1.62 to $58.15 in active trading of 1.5 million shares after Goldman downgraded the stock to Sell from Neutral. Shares are down on the news, but options order flow doesn’t seem to reflect the same bearish sentiment. 21,000 calls and 2,900 puts traded on the stock today. March 62.5 calls, which are falling 7.5 percent out-of-the-money and expiring in 46 days, are the most active in BBBY. 10,525 traded against 107 in open interest. The largest trade is a 4,175-contract block for 41 cents per contract when the market was 36 to 41 cents. January 57.5 and 77.5 calls are the next most actives in BBBY today, possibly driven by spread trading.

Regions Financial (NYSE:RF) adds 3 cents to $7.71 and options volume on the stock heading into midday includes 7,200 calls and only 45 puts. Much of the activity is concentrated in March 8 calls, which are 28-cents out-of-the-money. 5,780 contracts traded at an average price of 13.3 cents per contract against 3,583 in open interest. February 8 calls are the next most actives in RF. 777 contracts changed hands. It’s not clear what is motivating the activity, as there are no headlines on the stock today. The regional bank reported earnings last week.

Bearish Flow
Herbalife (NYSE:HLF) dropped $4 to $39.59 in active trading of 12 million shares after reports circulated that the FTC is investigating a multi-level marketing company for an alleged pyramid scheme. A specific company was not mentioned, but both HLF and Nuskin (NYSE:NUS) seem to be seeing a negative reaction to the headline. On the options front, 52,000 puts and 25,000 calls have traded in Herbalife so far. Weekly 42.5 puts, expiring on 2/1, are the most actives. 12,065 changed hands. Weekly 40 puts and 45 calls are also seeing interest and implied volatility in HLF options is up 37.5 percent to 83.

Walgreen (NYSE:WAG) shares are up 36 cents to $40.03 and new 52-week highs today and options order flow is interesting, as about 16,000 puts and 4,200 calls traded on the retailer. March 35 puts, which are more than $5 out-of-the-money, are the most actives. 5,333 contracts changed hands. March 34 puts, April 33 puts, and Mar 37 puts are also busy, as are the Jan 42 calls on Walgreen. It’s not clear what is motivating the interest and implied volatility is moving up 2.5 percent to 15.5. The company is due to report earnings late-March, outside of the March expiration.

Unusual Volume
Kerx Biopharmaceuticals (NASDAQ:KERX) options volume is running 7X the (22-day) average, with 46,000 contracts traded and call volume accounting for 56 percent of the volume.

International Paper (NYSE:IP) options volume is 5.5X, the average daily, with 45,000 contracts traded and call volume representing 93 percent of the activity.

Waste Management (NYSE:WM) options volume is running 9X the average daily, with 25,000 contracts traded and call volume accounting for 75 percent of the activity.

Increasing options activity is also being seen in Electronic Arts (EA), Cigna (NYSE:CI), and Staples (NASDAQ:SPLS).

Implied Volatility Mover
Implied volatility in the options on Repros Therapeutics (RPRS) is up sharply, as shares of The Woodlands, TX biotechnology company take a hit Monday. The company updated guidance for one of its pipeline drugs and shares fell $4.79 to $13.82 in heavy trading of 3.9 million on the news. By way of comparison, average daily volume is about 320,000 shares. Meanwhile, 20,000 calls and 22,000 puts, which is 7.5X the daily average. March and May 17.5 puts are the most actives and implied volatility in RPRX options surged 104.5 percent to 74.

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