Hot Option Plays: An Apple A Day Keeps The Bears Away Midday

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Cusick’s Corner 02-08-2013 Midday
“An Apple a day keeps the bears away!” This is exactly what is happening in the Tech sector, QQQ/XLK. Apple (NASDAQ:AAPL), the largest stock in the Tech sector, continues to move to the upside, gravitating towards the $500 level which would bring it to resistance. While this is positive action for the offensive sector, Tech has been lagging so it has some work to do to could catch up with its fellow offensive sectors, XLY/XLI/XLF. Most of you have heard that nibbling at this juncture is the mode of trading to consider. The rationale is that I do not like to chase markets and when the offensive sectors are underperforming the general market, i.e. the S&Ps, the current trend could be under some potential pressure or at least in a grinding mode. Until I see these sectors start to lead and outperform, I will be tempered. I also am seeing the Junk Bond market, HYG, starting to turn to weaken. This market has been nicely correlated with the equity market but that might be ending because the equities continue to grind higher and the HYG is not following suit. So either there is some economic risk or this could just be a flag for interest rate risk and the potential for continued weakness/pressure in the Treasury markets. The latter would be a positive for equities. See you After Hours.

Stock market averages are holding gains with help from earnings and economic data today. A report released early today showed the nation’s Trade Balance shrinking 20.7 percent to $38.5 billion in December, led by record exports of petroleum. A separate report on Wholesale Inventories is down .1 percent in December, compared to expectations for an increase of .3 percent. Meanwhile, LinkedIn (LNKD) shares surged 18 percent on the heels of its earnings report. Activision Blizzard (NASDAQ:ATVI) and AOL are also up on earnings. Moody’s (NYSE:MCO), Nuance (NASDAQ:NUAN), and Riverbed Technology (NASDAQ:RVBD) are seeing post-earnings weakness. Elsewhere, action was mixed across Asia, but European equity markets were mostly higher after losses suffered on the heels of ECB commentary yesterday. The euro is down another .2 percent to 1.337 on the dollar. Crude oil added 46 cents to $96.29 and gold lost $3 to $1668.5. On Wall Street, the Dow is up 35 points and the NASDAQ gained 25.5 points. CBOE Volatility Index (.VIX) is off .56 to 12.94. Overall trading volume in the options market is running about the typical pace, with 3.2 million calls and 2.4 million puts traded through 11:00am ET.

Bullish Flow
Southwest Airlines (NYSE:LUV) notched new 52-week highs today, but has given back the gains and is down 6 cents to $11.55. Options volume on the airliner is running 9X the daily average. About 13,000 calls and 285 puts traded on the stock so far. The top trades printed early when several lots of March 12 calls traded on LUV for 20 cents per contract when the market was 10 to 20 cents. More than 11,000 contracts now traded against 1,404 in open interest. March 12 calls on LUV are 3.9 percent out-of-the-money and expiring in 36 days. It’s not clear what is motivating the activity, as there are no obvious headlines on the airliner today. Earnings were last reported on 1/24.

Gamestop (NYSE:GME) is up 34 cents to $25.75 and rebounding from losses suffered earlier this week on reports the new XBOX might not support the use of previously used gaming discs. Trading in GME options is running 2.5X the daily average Friday. 17,000 calls and 425 puts so far. The top trade is a 7400-lot of May 30 calls for 30 cents per contract when the market was 26 to 31 cents. More than 12,000 contracts now traded against zero in open interest. No news on the stock today. Earnings are due out around Mar 21, possibly outside of the March expiration.

Bearish Flow
Target (NYSE:TGT) ticks 21 cents higher to $62.52 and options volume on the retailer so far today is 2.5X the daily average. 22,000 puts and 1,220 calls so far. The top trade is a spread, in which the investor bought 7,600 March 62.5 puts on TGT for $1.51 and sold 7,600 March 60 puts at 72 cents. The spread, for a 79-cent debit, traded on ISE and data from the all-electronic exchange indicate a roll. That is, the investor was selling the March 60s to close while opening a new position in the March 62.5 puts. 10,000 traded on the day. The position adjustment comes after a 5.7 percent month-to-date climb in the underlying. A shareholder might have initiated the trade to adjust a hedge against stock.

Sandridge Energy (NYSE:SD), the Oklahoma City, OK oil and gas company, has given up early gains and is down 18 cents to $5.76 today and options order flow is interesting. 88,000 puts and 4,725 calls traded on the stock. The top trade is a hefty spread, in which the investor bought 12,500 June 6 puts on the stock for $1.03 and sold 25,000 June 5 puts on SD at 51 cents. The 1X2, for 1 cent, has traded two times today and appears to be a new position in the name. It’s not clear what motivated the hefty spread, but it seems to be targeting a move down to $5 in the underlying stock through mid-June.

Unusual Volume
LinkedIn (LNKD) options volume is running 6X the (22-day) average, with 108,000 contracts traded and call volume accounting for 56 percent of the volume.

Activision Blizzard (NASDAQ:ATVI) options volume is 21X, the average daily, with 93,000 contracts traded and call volume representing 77 percent of the activity.

MBIA (NYSE:MBI) options volume is running 9X the average daily, with 56,000 contracts traded and put volume accounting for 94 percent of the activity.

Increasing options activity is also being seen in Nuance (NASDAQ:NUAN), Boyd Gaming (NYSE:BYD), and Coinstar (NASDAQ:CSTR).

Implied Volatility Mover
Implied volatility in the options on LinkedIn (LNKD) is down sharply, as shares of the social media company soar on earnings news Friday. LNKD is up $22.71 to $146.80 on heavy turnover of 7.5 million shares after the company reported EPS and revenue numbers that easily topped Street expectations. LinkedIn options are seeing brisk trading as well. 78,000 calls and 60,000 puts. Weekly 150 calls and 145 puts, expiring after today, are the most actives. Meanwhile, implied volatility is down 30 percent to 34.5 and falling back down towards the lower end of the 52-week range (31.5 and 86.7).

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