Hot Option Plays: This Market Is Holding In Spite Of… Midday

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Cusick’s Corner 01-31-2013 Midday
In spite of a negative GDP, increased Claims, higher taxes, this market is holding — oh, and the Fed is still dovish. I continue to watch the action in the Small Caps as my barometer on the economy and at this stage, RUT is holding up. I mentioned before that a rest may not be the worst reaction for a market that has been on a healthy march up, with broad-based support. Dips are looking to be met with some nibbling by the bid, but the data is tempering any long just biting into these pullbacks. (Enough with the bad analogies but I just got a new puppy and he is chewing everything!) I am watching Oil, USO and Materials, XLB, both are under pressure into the midday. See you After Hours.

Stock market averages are lower following a round of mixed economic reports and amid end-of-month position squaring Thursday. Data released early showed jobless claims increasing by 38,000 last week, to 368,000, and 23,000 more than expected. The disappointing number comes one day before the Labor Department releases its key monthly payroll report. Separate data showed Personal Incomes/Spending increasing by 2.6 percent and .2 percent, respectively. Incomes were expected to increase by .7 percent and spending by .3 percent. A third report on regional manufacturing was Chicago PMI, increasing to 55.6 in January, from 50.0 last month and much better than expectations of 50.5. Elsewhere, Japan’s Nikkei ticked higher to cap off its best January in 15 years. However, trading was mixed throughout other Asian equity markets and market averages are mostly lower in Europe. Crude oil lost 64 cents to $97.30 and gold gave up $18 to $1663.60. Back in the US, end-of-month portfolio adjustments and earnings news is driving some of the activity as well. Qualcomm (NASDAQ:QCOM), Mead Johnson (MJN), and Citrix Systems (NASDAQ:CTXS) are higher on the heels of their reports. Dow Chemical (NYSE:DOW), Time Warner (NYSE:TWX), and ConocoPhillips (NYSE:COP) are seeing post-earnings losses. The Dow Jones Industrial Average is down 21 points and the NASDAQ is flat. CBOE Volatility Index (.VIX) is up .03 to 14.35. Overall trading in the options market is running about the typical levels, with 2.7 million calls and 2.5 million puts traded through 11:00am ET.

Bullish Flow
Avon Products (NYSE:AVP) is flat at $16.73 per share and options volume on the cosmetics company is running 4X the daily average. 41,000 calls and only 540 puts traded on the stock so far. Much of the call activity is due to one spread trade after an 18,855-contract block of March 17 calls traded on AVP at 64 cents and 18,855 July 17 calls traded for $1.38. The spread, for 74 cents, traded on the ISE and data from the exchange indicate the Mar 17s were sold-to-close while the July 17s bought-to-open. If so, the position adjustment or “roll” seems to express diminishing expectations for a substantial rally in the stock through the March expiration (43 days), but hopes the stock will be trading at higher levels by mid-July.

LyondellBassell Industries (LYB) is up 79 cents to $63.79 and options on the stock are seeing interest today ahead of earnings, due out tomorrow morning before the start of trading. The stock is notching 52-week highs ahead of the news and options volume on the Dutch chemicals company is 2.5X the daily average. 7,345 calls and 3,333 puts in the name so far. February 60 calls, which are already in-the-money and will expire two weeks after the company reports, are the most active in LYB today. 5,070 traded against 1,138 in open interest.

Bearish Flow
The largest blocks of options traded so far today are in Exxon Mobile (NYSE:XOM) and are part of a spread trade, after an investor bought 30,000 July 87.5 puts on the oil giant for $2.79 and sold 30,000 July 77.5 puts at 90 cents. In other words, they bought the July 77.5 – 87.5 put spread on Exxon for $1.89, 30000X, according to a source on the exchange floor. A shareholder might have initiated the spread to help hedge earnings risk. Exxon reports tomorrow morning. ConocoPhillips (NYSE:COP) saw a similar spread yesterday in August puts. The stock is down $2.85 to $58.23 in the wake of its profit report.

Xerox (NYSE:XRX) drops 14 cents to $8.02 and options volume on the stock through midday is about 6,450 puts and 540 calls. The flow is focused on April 7 puts on the copier and printer company, where 5,540 contracts traded against 1,912 in open interest. The flow has been in smaller sizes. The top trade is a 479-lot for 10 cents per contract when the market was 9 to 10 cents. The interest in April 7 puts on Xerox comes the week after the company reported earnings. Shares are up more than 6 percent since that time.

Unusual Volume
Fusion Io (FIO) options volume is running 4X the (22-day) average, with 42,000 contracts traded and put volume accounting for 53 percent of the volume.

Skyworks (NASDAQ:SWKS) options volume is 3X, the average daily, with 25,000 contracts traded and call volume representing 78 percent of the activity.

Liberty Global (NASDAQ:LBTYA) options volume is running 10.5X the average daily, with 25,000 contracts traded and call volume accounting for 93 percent of the activity.

Increasing options activity is also being seen in JDS Uniphase (NASDAQ:JDSU), Taiwan Semi (NYSE:TSN), and Marathon Petroleum (MPC).

Implied Volatility Mover
Implied volatility in the options on Constellation Brands (NYSE:STZ) is up sharply, as the stock comes under fire Thursday. Shares dropped $7.74 to $31.43 on increasing volume after regulators reportedly blocked Inbev’s plans to buy Modelo. Constellation Brands is a distributor of Modelo in the US and was expected to benefit from the deal. Options on the stock are seeing increasing interest as well. 21,000 calls and 17,000 puts so far. February 37.5 calls and April 27.5 puts are the most actives and implied volatility rose 48 percent to 85.

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