Hot Option Plays: Bucking The Trend Midday

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Cusick’s Corner 02-07-2013 Midday
The market was challenged early and into the Midday is trading off the worst levels, 1494.50 on the S&Ps, after early headlines from ECB President and concerns about the strength of the Euro currency. This pushed the Dollar higher, UUP, which subsequently pushed the Euro and Equities down. This did not deter Japan where the Yen, FXY, continues to pull back and Equities in Japan are at levels not seen in over 4 years. Currency talk has been dominating the market today. The US and Japan have a policy in place to keep the upside moves tamed, “QE”, but it will be interesting to see how the Euro will react with little more than just headlines but no real printing able to occur. If the Dollar does continue to move to the upside this will continue to put pressure on the commodity space, so keep an eye on that Dollar strength. See you After Hours.

Stock market averages opened steady, but have come under pressure in the first hour of trading Thursday. Data released early showed jobless claims declining by 5,000 to 366,000 last week. Economists were expecting to see a drop to 360,000. Separate data on Fourth Quarter Productivity was down to a 2 percent annual rate, and .8 percent more-than-expected. Stock index futures ticked a bit lower on the data, but stock market averages opened steady when the bell rang on Wall Street. However, by mid-morning, market averages were in the red and the decline coincided with a drop in the Euro and commentary from ECB’s President Mario Draghi. The ECB concluded their latest meeting on rates and made no significant changes in monetary policy, as expected. Draghi offered a somber assessment of economic conditions in the post-meeting conference. The euro is off 1 percent to 1.3385 on the dollar. Gold gained, and is up $4 to $1683, but crude lost 45 cents to $96.17. On Wall Street, the Dow is down 117 points and the tech-heavy NASDAQ dropped 27. CBOE Volatility Index (.VIX) is up .89 to 14.30. Overall trading volume in the options market is running about the typical pace, with 2 million calls and 1.8 million puts traded through 10:30am ET.

Bullish Flow
Coinstar (NASDAQ:CSTR) adds 21 cents to $51.53 and is notching new 52-week highs today ahead of earnings. The company is due to release results after the closing bell. Recent options trades on the stock include a February 57.5 – 62.5 call spread for $1.10, 4500X. In this trade, according to a source on the exchange floor, an investor bought 4,500 February 57.5 calls on the stock for $1.50 and sold 4,500 February 62.5 calls at 40 cents. Volume exceeds open interest in both contracts. So, the spread appears to be a new position and possibly a short-term play on the earnings report. February options expire at the end of next week and will have six trading days of life remaining after CSTR releases results.

JP Morgan (NYSE:JPM) drops 37 cents to $48.24 and is moving off the record highs seen Tuesday. One player in the options market seems to see limited downside for the stock over the next five weeks and sold a 22,590-lot of March 47 puts on JPM at 60 cents per contract. More than 27,000 contracts traded against 6,219 in open interest. By writing the puts, the investor is stating that they are a willing buyer of JPM (100 shares per put) at $47 per share through the March expiration, which is in 36 days.

Bearish Flow
13,000 calls and only 50 puts have traded on Star Scientific (NASDAQ:STSI) today. Shares of the Glen Allen, VA dietary supplements and consumer products company are off 8 cents to $2 and the top trade is a 1,000-lot of March 3 calls traded for a nickel per contract when the market was 5 to 10 cents. Total volume is 5,393 against 4,628 in open interest. August 2.5 calls are the second most active in STSI and, of the 3,300 contracts traded, 92 percent traded bid side of the bid-ask spread. Meanwhile, 30-day implied volatility in the options on the stock is falling 7 percent to 74. The stock is down 26 percent year-to-date and the apparent premium writing in STSI seems to reflect expectations for limited upside for shares in the weeks/months ahead.

Sandridge Energy (NYSE:SD), the Oklahoma City, OK oil and gas company, drops 9 cents to $6.06 and a 20000-contract block of January 3 puts is bought on the stock for 20 cents per contract. Open interest is more than 22,000 and today’s put buyer might be closing a position opened in November when the same contract was being sold-to-open at 35 cents per contract. Shares are up 14.6 percent since that time and the closing of the contract might reflect concerns that shares might begin trending lower in the weeks/months ahead. That is, they no longer what to be short the puts on concerns the stock will fall and the puts will increase in value.

Unusual Volume
Akamai (NASDAQ:AKAM) options volume is running 4.5X the (22-day) average, with 30,000 contracts traded and call volume accounting for 53 percent of the volume.

Gap Stores (NYSE:GPS) options volume is 4X, the average daily, with 28,000 contracts traded and call volume representing 77 percent of the activity.

Marathon Petroleum (MPC) options volume is running 2.5X the average daily, with 22,000 contracts traded and call volume accounting for 99 percent of the activity.

Increasing options activity is also being seen in Devry (NYSE:DV), McGraw Hills (NYSE:MHP), and Star Scientific (NASDAQ:STSI).

Implied Volatility Mover
Implied volatility in the options on Devry (NYSE:DV) is down sharply, as shares of the for-profit education company move higher on earnings news today. The stock is up $5.59 to $31.71 in heavy trading of 2.7 million shares. 9,275 puts and 2,135 calls traded on the stock, which is 15X the daily average. March 30 puts are the most actives and might be seeing some premium selling, as 4,740 traded and 91 percent of the flow has been on the bid. Implied volatility in the options on the stock dropped 35 percent to 42.

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