Hot Option Plays: Tech Gaining Strength Into Midday Midday

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Cusick’s Corner 02-05-2013 Midday
The market opened higher and there has not been much in the way of sellers into the Midday in any of the major indices. The action in the Tech sector is also impressive — QQQ is up +1.16% today and has clawed back almost yesterday’s entire pullback. If the Tech heavyweights can finish the day with an upside bias firmly intact this could signal strength in this lagging sector and would be a nice catalyst for the market. I am watching Crude and Silver. These commodities could be on the move, potentially challenging to the upside. See you After Hours.

Stock market averages are broadly higher Tuesday and have erased most of the losses suffered the day before. The Dow Jones Industrial Average followed European markets lower yesterday and lost 130 points amid political uncertainty in the Eurozone, followed by an uptick in Spanish and Italian bond yields. However, most European markets are higher Tuesday and the euro rebounded .3 percent to 1.356 on the dollar. Crude oil prices are up 61 cents to $96.78. Gold and Treasury Bonds traded a bit lower. On the domestic economic news front, a report showed the ISM Services Index falling to 55.2 for January, from 55.7. Economists were looking for the index of economic activity (outside of manufacturing) to print at 55.6. There was minimal reaction to the headline. Meanwhile, the earnings news is mixed. Arch Coal (NYSE:ACI), Baidu (NASDAQ:BIDU), and Yum Brands (NYSE:YUM) are among the names ticking lower. Estee Lauder (NYSE:EL), Eaton Corp (NYSE:ETN), and Becton Dickinson (NYSE:BDX) are seeing post-earnings strength. The Dow has recovered 115 points and the NASDAQ added 28 points. Overall trading volume in the options market is greater than yesterday, with 2.7 million calls and 2.8 million puts traded through 11:00am ET.

Bullish Flow
Zynga (ZNGA) is zipping higher on the heels of an analyst upgrade and options on the stock are seeing flurry of activity Tuesday morning. The stock is up 13 cents to $2.69 on heavy turnover of 24.5 million shares, which is 3X the normal. On the options front, 24,000 calls and 10,000 puts traded on the Redwood City, CA social media company. February 3 calls, which are 31 cents out-of-the-money and expiring in 10 days, are the most actives in ZNGA. More than 4,000 contracts changed hands. March 3 calls, February 2.5 puts, and June 3 calls are the next most actives and implied volatility in ZNGA options is moving up 8 percent to 94.5 ahead of earnings, due out after the closing bell Tuesday.

A hefty block of options trades on Electronic Arts (EA) Tuesday morning after an investor bought 26,000 March 17 calls on EA for 44 cents per contract. The stock is up 81 cents to $16.81 today on news the company’s CEO bought $500,000 worth of stock on Friday. The hefty call buyer, when the stock was trading for $16.38, might have been closing a position. Open interest in the contract is more than 27,000 and trade history shows that a large block was opened at 48 cents per contract on December 11. It appears that an investor sold those calls, possibly part of a covered call on EA, to open at that time. Shares have moved more than 8 percent since then, but time decay has had an impact on the premium and calls are being bought back for 44 cents (4 cents less than the original trade) to close the position.

Bearish Flow
The largest block of options traded so far today is in the SPDR Financial Fund (XLF) after an investor bought an April 16 – 17 put spread on the exchange-traded fund for an average of 21.5 cents, 100,000X. That is, they bought 100,000 April 17 puts on the stock for an average of 34.5 cents and sold 100,000 April 16 puts at 13 cents. Looking at trade history of these two contracts, the massive spread appears to be a position adjustment, in which the investor was selling-to-close a position in April 16 puts on XLF opened on January 8 and is opening a new position in the April 17s. The adjustment comes after a 3.5 percent move higher in the underlying. XLF, which holds all of the financial-related names from the S&P, is up 14 cents to $17.55 Tuesday.

Sandridge Energy (NYSE:SD) drops 18 cents to $6.09 and options volume on the Oklahoma City, OK oil and gas company is running 3.5X the daily average. One investor bought a 3,500-lot of September 7 puts on the stock this morning for an average of $1.755 per contract, according to a source on the exchange floor. The biggest trade in SD, however, is a 22000-contract block of June 4 puts for 22 cents per contract. Open interest is 41.8K and today’s trade appears to cover some positions opened on 12/17 when 40,000 were sold at 19.5 cents (as part of a Jun 4 – 7 put spread). 45,000 puts and 17,000 calls traded in SD today.

Unusual Volume
Baidu.com (NASDAQ:BIDU) options volume is running 2X the (22-day) average, with 109,000 contracts traded and put volume accounting for 54 percent of the volume.

Yum Brands (NYSE:YUM) options volume is 4.5X, the average daily, with 76,000 contracts traded and put volume representing 68 percent of the activity.

Merck (NYSE:MRK) options volume is running 3X the average daily, with 24,000 contracts traded and call volume accounting for 74 percent of the activity.

Increasing options activity is also being seen in Sandridge Energy (NYSE:SD), Electronic Arts (EA), and Arch Coal (NYSE:ACI).

Implied Volatility Mover
Implied volatility in the options on Liberty Global (NASDAQ:LBTYA) is up sharply, as the stock comes under pressure Tuesday. LBTYA is down $2.84 to $66.62 on reports the company is in talks with the UK’s Virgin Media (NASDAQ:VMED) about a possible transaction. Shares of Virgin Media are rallying $6.31 to $45 on the headline. Meanwhile, LBTYA is down on heavy turnover of 2.5 million shares. 1,400 calls and 1,260 puts traded in the name and 30-day implied volatility in the options on the stock is up 26.5 percent to 26.5.

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