Hot Option Plays: Defensive Sectors Lead Into The Close After Hours

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Cusick’s Corner 01-29-2013 After Hours
As the market continued to grind into the After Hours there were some notable tells that popped up near the close today. First, higher beta Small and Mid Caps, RUT/MDY are underperforming. The market needs these to continue to pace (if not lead) if we want to continue to see a path higher. Second, Transports, IYT, have come under some brief pressure after some notable consolidation the last three sessions and with the Fed and the Payroll numbers due out tomorrow, this could be a potential negative flag going forward. Third, defensive sectors were leading into the close, XLP/XLU/XLV, compared to the S&Ps, which again is not the strength that you would want to see if a rally were to continue. I am keeping an eye on this into the Fed tomorrow. See you Midday.

The Dow Jones Industrial Average finished at its highest levels in more than five years with help from earnings news Tuesday. Pfizer (NYSE:PFE) gained 3.2 percent and was the Dow’s biggest winner in the wake of its earnings report. CIT, Valero (NYSE:VLO), and Eli Lilly (NYSE:LLY) were also higher. However, a number of tech names, including EMC, VM Ware (NYSE:VMW), and Seagate Technology (NASDAQ:STX), saw post-earnings losses. On the economic front, Consumer Confidence fell to 58.6 in January, from 66.7 and well below expectations of 65.1. Yet, trading was mostly mixed across overseas equity markets and, while crude oil rose $1 to $97.44, gold gained $10 to $1663.On Wall Street, the Dow rose 72 points to finish at its best levels since October 2007. The tech-heavy NASDAQ lost .64 points. ADP offers a look at the jobs market Wednesday morning with a private sector report. GDP numbers will also be released and FOMC will give a rate announcement tomorrow afternoon.

Bullish
Phillips 66 (PSX) might be a name worth watching Wednesday morning. The company is due to release earnings tomorrow morning and shares rose $2.79 to $59.88, new 52-week highs today, in active trading of 8.25 million shares ahead of the news. A number of oil refining names were in focus today after Valero (NYSE:VLO) shares jumped 12.8 percent on the heels of its profit report. On the options front, trading is PSX was busy as well. 25,000 calls and 9,730 puts traded on the ticker. February 55 calls, which are now $4.88 in-the-money after today’s rally, were the most active in PSX and were possibly seeing some liquidating trades. 7,630 traded against 34,023 in open interest. At the same time, February 60, 62.5 and 65 upside calls saw interest as well. Feb 55 and 57.5s were the most active put options in PSX today.

Bullish trading was also seen in Trina Solar (NYSE:TSL), Citrix Systems (NASDAQ:CTXS), and Marathon Petroleum (MPC).

Bearish
Juniper Networks (NASDAQ:JNPR) dropped 62 cents to $21.58 in active trading of 7.5 million shares on a CNBC story that said the US government is growing concerned about the risk of a hack threat to network gear. The stock slid on the headline and options volume was 2.5X the daily average. 17,000 puts and 2,400 calls traded on the stock. Much of the flow was concentrated in February 21 puts and was in smaller sizes. The largest trade was an 875-lot for 28 cents per contract. At the end of the day, 13,923 contracts traded against 6,325 in open interest and implied volatility in options on Juniper Networks was up 6.5 percent to 32.5.

Bearish trading was also seen in Discover Financial Services (NYSE:DFS), Aruba Networks (NASDAQ:ARUN), and Computer Sciences (NYSE:CSC).

Index Trading
Overall action in the index market was very light again Tuesday. 575,000 calls and 662,000 puts traded on the S&P 500, VIX and other cash index products, which is 77 percent of the recent daily average volume, according to Trade Alert data. One product saw increasing volume, however. The European-style S&P 100 Index (.XEO) saw 2X the normal volume. 6,880 calls and 2,470 puts traded on the ticker. The index hit new multi-year highs and Weekly 685 and 690 calls (which expire 2/1) were the most actives. XEO is identical to the S&P 100 Index (.OEX), but the ticker symbol is reversed and there is an important difference in how the options contracts settle. An American style option, like OEX and listed equity options, can be exercised at any time prior to expiration. XEO and most other cash indexes, like SPX, settle European-style and contracts can only be exercised at the expiration.

ETF Action
The iShares China Fund (FXI) was the subject of somewhat unusual options activity. Shares, which hold some of the leading publicly-traded Chinese companies, finished the day up 59 cents to $41.55. In midday trading, a block of 50,000 February 43 calls traded on FXI for 15 cents per contract. An investor bought the calls, according to a source on the exchange floor. Later, 40,000 more traded for 16 cents. At the end of the day, 94,715 February 43 calls traded on FXI against 30,640 in open interest. The contract is 3.5 percent out-of-the-money and expires in 17 days. FXI has not traded north of $43 since July 2011.

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