Hot Option Plays: Interesting VIX Activity After Hours

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Cusick’s Corner 02-13-2013 After Hours
This is a market that is supported by institutional money and stimulus. Earnings have been solid but the rev misses and makes are not painting a picture that gives the retail trader the need to jump into this market at the highs with both feet. So what to do? First, as I have said before, do not chase. Second, when we get dips either in individual equities or general indices, look to see if nibbling is warranted or if a trend shift actually started to transpire. Last, be patient. This is an overbought market and has been like that for a while now. Looking at the VIX, we are still right off the lows of the year and of 2007. Take a look at the commentary on the VIX spread in May that traded today, there is at least one strategist who is looking to potentially capitalize on a pop in the volatility index into May. See you Midday.

Trading finished mixed again Wednesday after a report on Retail Sales was in-line with expectations. Total sales ticked up just .1 percent in January. The headline number matched economist estimates. The financial press was also focused on President Obama’s State of the Union address. In the speech Tuesday evening, the President emphasized the need for clean energy and stricter gun control. He also urged Congress to act before the March 1 deadline for the $85 billion in automatic government spending cuts. At the end of the day, the speech offered little new information and there was minimal reaction to the commentary. European markets finished with modest gains. Crude oil drifted down 35 cents to $97.16 and gold lost $7 to $1642.5. On Wall Street, Deere (NYSE:DE) was out with better-than-expected earnings, but shares lost 3.5 percent. Meanwhile, the Dow Jones Industrial Average slipped into midday and remained range-bound in the afternoon session. The Dow lost 36 points Wednesday. However, the tech-heavy NASDAQ added 10.4 points.

Bullish
Tyco International (NYSE:TYC) adds 49 cents to $31.50 in active trading of 3.6 million shares after Bloomberg ran a story about the Swiss based security and protection services company, calling it “takeover bait”. Shares moved higher on the day and options volume was lopsided, as 7,550 calls and 550 puts traded on the ticker. March 34 calls were the most active in Tyco International Wednesday. 2,310 traded against 63 in open interest. March 31 and 33 calls saw interest as well and implied volatility in TYC options was up 2 percent to 20.5.

Bullish trading was also seen in Las Vegas Sands (NYSE:LVS), Groupon (GRPN), and General Dynamics (NYSE:GD).

Bearish
Big Lots (NYSE:BIG), a Columbus, OH discount retailer, was up 25 cents to $33.50 and put volume trounced call activity in the name today. 3,900 puts and 650 calls traded on BIG today. March 30 puts were the most active. 1,819 contracts traded against 1,588 in open interest. Most of the flow was in smaller lots traded for 60 cents when the market was 50 to 60 cents. March 27.5 puts were the second most actives. 1,554 contracts changed hands. The increased put activity in the March term might be designed to hedge earnings event risk. BIG reports results around February 28.

Bearish trading was also seen in Dunkin Brands (DNKN), Masco (NYSE:MAS), and Polycom (NASDAQ:PLCM).

Index Trading
Options on the CBOE Volatility Index (.VIX) were busy Wednesday. The February options expired today and the settlement value was 13.07. Now, some investors were probably opening positions in later expiration months to replace the expiring Feb upside calls, because VIX options are sometimes used within larger stock portfolios to help hedge the risk from volatility spikes in the US equity market. A total of 594,000 calls and 153,000 puts traded in the VIX pit today. In fact, VIX May 18 and 25 calls were among the day’s most active contracts. An investor was buying the spread (buying 18s and selling 25s), 116,000X on the day.

ETF Action
iShares Mexico Fund (EWW) dropped $1.30 to $71.71 amid volatility in equity markets just south of the border. Mexico’s Bolsa Index lost 1.7 percent today. Some investors might be concerned about further declines, as about 21,000 puts and 4,510 calls traded in EWW today. September 68 puts saw the bulk of the flow. 13,919 contracts traded against zero contracts of open interest. The largest trade was a block of 13,650 Sep 68 puts for $2.83 per contract when the market was $2.70 to $2.85. An investor might have an initiated the hefty premium purchase against a portfolio of Mexican names to help hedge the risk of further losses in the months ahead.

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