Hot Option Plays: Is Pullback Healthy? After Hours

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Cusick’s Corner 01-30-2013 After Hours
The Fed spoke and the market pulled back. The market indices did try to challenge new highs right after the Midday, but the Dow, DJX, and the S&Ps, SPX, were able to hold these gains post the Fed. Really, this does make sense because we have had huge moves and the market was looking for a point to take a rest. I will be keeping an eye on the Small Caps, IWM, to see if this becomes a deeper pullback, i.e. if it breaks $87 which is a level that it consolidated for over 2 weeks. As I have mentioned in the past, the Small Cap stocks are often great indicators for the health of our domestic economy and tend to be leaders in a trend. Now this pullback could be short-lived. The bonds continue to pop on the yield side with now the shorter end of the curve, 2 & 5 years, which favors economic growth. This will put the Employment data at the end of this week front and center. Any weakness in employment picture could halt the current assent in bond yields. See you Midday.

Stock market averages finished with modest losses following disappointing news on economic growth and after the Federal Reserve concluded its most recent meeting on monetary policy Wednesday. Data released early in the day showed GDP contracting at an annual rate of .1 percent in the fourth quarter. Economists were expecting an increase of 1 percent and the decline marks the first period of contraction for the US economy in several years. Separately, ADP reported that the US economy added 192,000 private sector jobs in January, which was 17,000 more-than-expected. However, December numbers were revised down to 185,000 from 215,000. Stock market averages dipped at the open and despite post-earnings gains in a few large caps like Amazon.com (NASDAQ:AMZN), Phillips 66 (PSX), and ADT. Elsewhere, Japan’s Nikkei jumped 2.3 percent on a weaker yen and helped pace a broader advance across Asia’s equity markets, but European markets were mostly lower and the euro is up .5 percent to 1.356 on the dollar. Back in the US, focus shifted to the FOMC’s latest meeting on monetary policy Wednesday afternoon. Officials offered no surprises and pledged to continue bond purchases until the employment situation improves. The Dow Jones Industrial Average pulled back from five-year highs and lost 44 points on the day. The NASDAQ dropped 11.4 points.

Bullish
MetroPCS (NYSE:PCS) saw unusual activity Wednesday. Shares were up 15 cents to $9.90 and options volume on the stock was very lopsided. 34,000 calls and less than 200 puts traded on the stock. The activity included a 20,000-lot of March 12 calls that were bought for 11 cents per contract, according to a source on the exchange-floor. At the end of the day, 20,303 contracts traded against only 10 contracts of open interest. February 10, February 11, and May 10 calls on PCS saw interest today as well. It’s not clear what is motivating the activity. PCS inked a deal to combine with Deutsch Telecom’s T-Mobile unit in October.

Bullish trading was also seen in Staples (NASDAQ:SPLS), H&R Block (NYSE:HRB), and Freescale Semiconductor (FSL)

Bearish
The largest blocks of options traded Wednesday surfaced in an unlikely name. Conoco Phillips (NYSE:COP) finished the day down 57 cents to $61.09 and a hefty August 57.5 – 47.5 put spread was bought on the oil giant for $1.80, 48700X. In this trade, the investor bought 48,700 August 57.5 puts on COP for $2.27 and sold 48,700 August 47.5 puts at 47 cents, according to a source on the exchange floor. More than 50,000 traded in both contracts. The activity will create the largest blocks of open interest in the name and the spread will offer its best payoff is shares tumble to $47.5 per share or below through the August expiration. The company is slated to release its earnings results this afternoon.

Bearish trading was also seen in Lockheed Martin (NYSE:LMT), Newell Rubbermaid (NYSE:NWL), and FTI Consulting (NYSE:FCN).

Index Trading
Overall action in the index market was very light for a third day this week. 545,000 calls and 639,000 puts traded on the S&P 500 (.SPX), CBOE Volatility Index (.VIX) and other cash index products, which is 77 percent of the recent daily average volume, according to Trade Alert data. VIX, which tracks the implied volatility priced into SPX options, jumped 1.01 points to 14.32 after the S&P 500 lost 5.88 to 1,501.96. The volatility index has now increased by 15.2 percent in a little more than a week. The market’s “fear gauge” fell to multi-year lows of only 12.43 last-Tuesday and has been ticking higher in recent days ahead of key economic news, including jobs data on Friday.

ETF Action
Put options on the iShares Long-term Bond Fund (TLT) were actively traded Wednesday. Shares, which represent ownership in a basket of longer-term Treasury bonds, were down 20 cents to $116.75 and total volume on the ETF was 142,000 puts and 27,000 calls, which represents 3X the daily average for the product. Big spread trades drove much of the activity. For instance, at one point, an investor sold 23,000 February 120 puts on TLT at $3.60 and bought 26,750 March 116 puts for $2.10. The activity in the March 116 puts looks opening because volume exceeds open interest. Trade history indicates that large blocks of February 120 puts were opened on 1/15 and 1/16 when TLT was trading north of $120. Now, after the decline in shares during the past six trading days, the investor appears to be closing out the position in the in-the-money February puts, while opening a new one in March slightly out-of-the-money downside puts. If so, the position adjustment seems to reflect concerns about further losses for long-term Treasury bonds (higher yields) over the next 44 days.

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