Hot Option Plays: Tracking Bonds For A Momentum Signal Midday

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Cusick’s Corner 02-01-2013 Midday
The bounce into the Midday needs to break through resistance. This is an impressive move and while the market looks overbought, the buying breadth of the move has been across most asset classes, except for the Dollar, UUP. Another interesting move that has occurred is in the Bonds where there was an initial pop on the Jobs number and now the long-end of the curve is in the red. If this move in the Bonds continues, it could signal decent momentum for a continued push higher in equities. See you After Hours.

Stocks are broadly higher after investors digested this week’s final dose of economic stats Friday. The headline number showed the US economy adding 157,000 jobs last month and the unemployment rate increasing to 7.9 percent from 7.7 percent. Economists were expecting 180,000 new jobs and the rate of unemployed holding steady at 7.7 percent. However, December numbers were revised up to 196,000 from 155,000 and the day’s other economic news was mostly better-than-expected. University of Michigan Sentiment Index is up to 73.8 in January, from 71.1 and better than the 71.3 that had been expected. Construction Spending rose .9 percent in December and .4 percent more than expected. ISM Index for January rose to 53.1, from 50.2 and better than the 50.5 that had been expected. On the earnings front, Merck (NYSE:MRK) is down 3 percent and the biggest loser in the Dow Jones Industrial Average on the heels of its report and Exxon Mobile (NYSE:XOM) is flat. However, the other 28 components of the Dow are higher and the industrial average is kicking off February with a 135-point gain. The NASDAQ rallied 31 points. CBOE Volatility Index (.VIX) dropped 1.5 points to 12.78 and is at session lows. Overall trading in the options market is active, with 4.7 million calls and 3.8 million puts traded through 12:00pm ET.

Bullish Flow
Allstate (NYSE:ALL) adds 84 cents to $44.74 and options volume on the insurance company is running 5.5X the daily average. 17,000 calls and 940 puts traded in the name through midday. Much of the flow is concentrated in the February 45 calls and included a morning buyer of 4,000 contracts for 68 cents per contract, according to a source on the exchange floor. More than 10,800 February 45 calls have now traded in Allstate at a value-weighted average price [VWAP] of 76.7 cents against 913 in open interest. February 44 calls on ALL are also seeing interest. 2,304 traded against 1,235 in OI. The increased activity comes ahead of the company’s February 6 earnings report.

The largest block of options traded so far today is in the SPDR Financials (XLF). The ETF, which represents ownership in shares of all of the financial-related companies included in the S&P 500, is up 27 cents to $17.65 and notching new multi-year highs. The big options trade in XLF is a 50,000-contract block of April 18 calls traded for 30 cents per contract. 52,000 XLF April 18 calls now traded against 13,151 in open interest. Some investors might be opening positions in the upside XLF calls on expectations for further gains in shares of the big banks and brokers in the months ahead.

Bearish Flow
Quanta Services (NYSE:PWR), a Houston, TX electric power and natural gas company, is up a nickel to $29.02 and options volume on the stock is running 12X the recent daily average. 15,000 puts and 2,080 calls traded in PWR options so far. The top trade is a 6020-lot of February 28 puts for 30 cents per contract when the market was 20 to 30 cents. 9,458 contracts traded against 4,072 in open interest. March 28 and Feb 29 puts on PWR are also seeing interest and implied volatility is up 8 percent to 27.5. No news on the stock to explain the increased activity. Earnings expected around Feb 20, possibly after the February expiration.

Rite Aid (NYSE:RAD) adds 10 cents to $1.70 and options volume on the stock is running 8X the daily average. 14,000 calls and 190 puts so far. The top trade is a 7000-lot of January 2 calls at 20 cents per contract. An investor sold the calls and appears to be opening a new position. 8,420 contracts traded against 6,642 in open interest. Upside call writing is not necessarily bearish trading, but seems to express the view that the upside for the stock is limited. RAD has already surged more than 60 percent since late-December.

Unusual Volume
AIG options volume is running 2X the (22-day) average, with 122,000 contracts traded and call volume accounting for 75 percent of the volume.

Keryx Pharmaceuticals (NASDAQ:KERX) options volume is 3X, the average daily, with 63,000 contracts traded and put volume representing 63 percent of the activity.

National Oilwell (NYSE:NOV) options volume is running 2X the average daily, with 28,000 contracts traded and put volume accounting for 58 percent of the activity.

Increasing options activity is also being seen in Allstate (NYSE:ALL), Rite Aid (NYSE:RAD), and Manitowac (NYSE:MTW).

Implied Volatility Mover
CBOE Volatility Index (.VIX) is falling sharply, as the S&P 500 Index (.SPX) rallies 14.19 points to 1512.30 and notches new five-year highs Friday. VIX, which tracks the expected or implied volatility priced into SPX options, is falling now that this week’s economic stats have been released and the important “event risk” is now off the table. VIX is down 10.8 percent since Wednesday. Volumes in the VIX pit are light despite the big move in the index. About 122,000 calls and 70,000 puts so far.

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