Hot Option Plays: Pullback Is Just A Pullback Midday

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Cusick’s Corner 02-04-2012 Midday
Today the equities market is firmly in the red but this is after a spectacular January and the negative headlines out of the EU. While I think that this is a move that needs to be respected, I do not see it at this stage as a turning point or reversal from the strength that we have seen over the last month. Financials, XLF, Transports, IYT, have been hot and continue to lead and the money that has been flowing out of Bonds appears to be finding better entry points into the Equities today. With that said those entry points will be and should be tempered, dips at this point could be nibbled not just chopped into. I want to also keep an eye on Tech, XLK/QQQ, this sector has been lagging the upside push and could potentially get a little deeper than the other sectors. Finally, I want to apologize for not having the After Hours out to readers and our publishing team, I forgot to push send. See you After Hours.

Stocks are broadly lower on a light news day and amid worries about Europe Monday. The only domestic economic stat of the day showed Factory Orders down 1.8 percent in December. Economists were expecting an increase of 2.4 percent. Overseas, trading was orderly across Asia’s equity markets, but European benchmarks are deep in the red following an uptick in Spanish and Italian bond yields. France’s CAC 40 shed 2.7 percent and Germany’s DAX lost 2.2 percent. Bigger losses are being seen in Italy and Spain, while the euro dropped .7 percent to 1.354 on the dollar. Crude oil slid $1.16 to $96.61. Bonds and gold are seeing a modest flight-to-safety bid. On Wall Street, 29 of the Dow thirty are under water, led by losses in Travelers (NYSE:TRV), Walmart (NYSE:WMT) and Merck (NYSE:MRK). The NASDAQ dropped 33.7 points. Overall trading volume in the options market is on the light side and a bit more defensive, with 2.45 million calls and 2.4 million puts traded through 11:00am ET.

Bullish Flow
Las Vegas Sands (NYSE:LVS) drops $1.32 to $54.55 and options volume on the casino-operator is impressive today. 68,000 calls and 7,540 puts so far. One spread trade drove much of the activity after an investor sold 23,125 March 52.25 calls on the stock at $3.95 and bought 23,125 March 55 calls for $2.33. That is, according to a source on the exchange floor, a hefty March 52.25 – 55 call spread was sold on LVS at $1.62 per spread. The 52.25 calls are in-the-money and, looking at trade history, a substantial position in the contract was opened on January 7 for $2.67 per contract when the stock was trading below $52 per share. Now, the investor is apparently liquidating the position, while opening a new one in the out-of-the-money March 55 calls. If so, they seem to be expressing confidence in the stock for the weeks ahead. LVS reported earnings last week.

Expediters International of Washington (NASDAQ:EXPD) adds 15 cents to $42.88 and recent trades on the stock include a 7,500-contract block of March 45 calls for 70 cents per contracts. Several smaller lots also traded this morning for prices ranging from 59 to 65 cents per contract. 10,424 EXPD March 45 calls now traded against 522 in open interest. The increased activity in March upside calls on EXPD comes ahead of the company’s earnings report, the morning of February 26.

Bearish Flow
The largest block of options traded so far today is in the SPDR Financial Fund (XLF) after a 45,000-lot of February 17 puts traded on the ETF at a nickel per contract. Shares are down 17 cents to $17.45 and an investor sold the puts, according to a source on the exchange floor, and also bought 7,500 April 17 puts on XLF for 37 cents and sold 7,500 April 15 puts at 7 cents. If so, the investor might have exited a substantial block of February 17 puts, which are 45 cents out-of-the-money and expiring in 11 days, while opening a new smaller position in an April 15 – 17 put spread for 30 cent per spread. XLF is a fund that holds all of the financial-related names from the S&P 500 and an investor is possibly taking positions in downside puts to hedge a portfolio of banking and brokerage names.

Corrections Corp of America (NYSE:CXW) lost 25 cents to $37.70 on light volume of 183,000 shares. Yet, options volume on the stock is running 5.5X the daily average. 6,020 puts and 240 calls so far. The top trade is a 4,000-lot of March 34 puts for 50 cents per contract when the market was 40 to 50 cents. 5,050 now traded against 390 in open interest and implied volatility in CXW options is up 20 percent to 38.

Unusual Volume
McMoran (NYSE:MMR) options volume is running 6.5X the (22-day) average, with 40,000 contracts traded and call volume accounting for 85 percent of the volume.

Acme Packet (NASDAQ:APKT) options volume is 3.5X, the average daily, with 27,000 contracts traded and call volume representing 79 percent of the activity.

Genworth (NYSE:GNW) options volume is running 2.5X the average daily, with 26,000 contracts traded and call volume accounting for 53 percent of the activity.

Increasing options activity is also being seen in Archer Daniels Midland (NYSE:ADM), Humana (NYSE:HUM), and Deutsche Bank (NYSE:DB).

Implied Volatility Mover
Implied volatility is broadly higher across the listed options market Monday. CBOE Volatility Index (.VIX) is up 1.08 points, or 8.4 percent, to 13.98. VIX tracks the expected volatility priced into S&P 500 Index options. Meanwhile, the NASDAQ 100 Volatility Index (.VXN) ticked up .71 to 14.60. Implied volatility in Apple (NASDAQ:AAPL) options, as measured by the Apple Volatility Index (VXAPL), edged up .35 to 27.77 and the Goldman Sacks IV index (VXGS) rose 1.35 points to 25.61. Implied volatility on oil (OVX), gold (GVZ) and the Emerging Markets Fund (VXEEM) are also higher on the day.

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