Hot Option Plays: Watching Paint Dry After Hours

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Cusick’s Corner 02-11-2013 After Hours
It’s like watching paint dry — today volume was low, action tight so discipline is the key. With low volume and the fact that the market is running into some decent resistance to the upside, there has been little in equities to do at this stage except manage any February expiring assets. As I look out at the earnings landscape, retail is on the radar. Retail, XRT, and Consumer Discretionary, XLY, sectors are at heavy resistance. Along with this resistance, these offensive sectors seem to be losing the leadership that they once had which is a potential short-term red flag. Do not force it in this environment. See you Midday.

Stock market averages drifted lower at the open and remained in a narrow range Monday. It was a very slow news day. Equity markets were closed in Japan, Hong Kong and Shanghai. Benchmarks tracking Eurozone stocks finished mixed and the euro ticked up .25 percent to 1.34 on the dollar. On the domestic news front, the economic calendar is light this week until Retail Sales are reported Wednesday morning. Investors will also be interested in President Obama’s State of the Union address Tuesday evening for any talk related to the deep government spending cuts due to take effect on March 1. The earnings calendar is slowing, but a handful of consumer names will report this week. Dow component Coca Cola (NYSE:KO) releases its profit report Tuesday morning. In other markets, crude oil erased midday losses and was up $1.28 to $97. However, gold lost $16.5 to $1650.50. On Wall Street, the Dow was down 20 points midday and finished off 22. The NASDAQ dropped less than 2 points.

Bullish
Micron Technology (NYSE:MU) is up 17 cents to $7.92 and options volume on the memory chipmaker is impressive, as 45,000 calls and 4,000 puts traded in the name, a ratio of more than ten-to-one. One spread trade drove some of the activity after an investor apparently sold 12,760 February 8 calls on the stock at 11 cents per contract and bought 12,760 March 9 calls for 8 cents. The spread, for 3 cents, traded more than once and appears to roll a bullish position out one month and up one strike. That is, the investor is closing out Feb 8 calls for fear the contract will expire worthless if shares hold below that strike price though this week’s expiration. 19,300 Feb 8 calls traded on Micron against 52,777 in open interest. Meanwhile, they are opening a new position in upside March 9 calls, where volume is 21,300 contracts against 9,716 in open interest. If so, it appears to be a longer-term strategy on MU. Looking at trade history, the Feb 8 calls were apparently opened on 1/18 and rolling out of a large position of January 7.5 calls on MU.

Bullish trading was also seen in Diamond Foods (NASDAQ:DMND), Kroger (NYSE:KR), and MBIA (NYSE:MBI).

Bearish
Smith & Wesson (NASDAQ:SWHC) dropped in afternoon trading Monday and is down 11 cents to $9.10 heading into the closing bell. Sturm Ruger (NYSE:RGR) also ticked lower in afternoon trading and is down $1.75 to $53.63. The weakness in shares of the gun-makers comes ahead of the President’s State of the Union address Tuesday evening. Some investors might be concerned that comments about gun control will weigh on shares of the two companies later in the week. For whatever reason, RGR and SWHC are down and, in option action, February 9 puts on Smith & Wesson are the most active. The contract is now 10 cents out-of-the-money and expiring at the end of the week. 3,544 contracts traded against 3,068 in open interest.

Bearish trading was also seen in MGIC (NYSE:MTG), Conway (NYSE:CNW), and First Energy (NYSE:FE).

Index Trading
Overall options volumes were very light in the index market, but will probably pick up tomorrow ahead of the expiration of options on the CBOE Volatility Index (.VIX) on Wednesday and then later in the week due to the standard expiration of other February contracts. 410,000 calls and 573,000 puts traded on the S&P 500 Index (.SPX), S&P 100 Index (.OEX), and other cash index products, which only about 60 percent the average daily levels, according to Trade Alert data. The S&P 500 traded in a rather narrow 4.7-point range and lost .92 to 1,517.01. VIX, which tracks the expected volatility priced into SPX options, lost .09 to 12.93 in uninspired fashion. Yet, some names saw increasing implied volatility today. For example, IV in Apple (NASDAQ:AAPL) options, as measured by VXAPL, was up 2.15 points to 30.79. Implied volatility in the SPDR Gold Fund (GLD) was up 1.24 points to 14.38.

ETF Action
A large spread traded in the SPDR 500 Trust (SPY) Monday. An investor apparently bought 30,000 March Quarterly 149 puts on SPY for $1.79, sold 60,000 March Quarterly 141 puts at 54 cents per contract, and bought 30,000 March Quarterly 133 puts at 21 cents. The three blocks of puts appear to be part of a Mar 133 – 141 – 149 put butterfly spread, for 92 cents, in the Quarterly options that expire on 3/31. SPY lost 3 cents to $151.77 on the day and the spread might have been initiated to help hedge a stock portfolio. The best payoff from a long put butterfly spread happens of shares fall to the middle (141) strike, or 7.1 percent, through the expiration.

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