Hot Option Plays: Sector Breakouts, Indexes Grind Midday

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Cusick’s Corner 02-14-2013 Midday
While breakouts abound in Finance, XLF, Energy, XLE & Semis, SMH, you cannot help but notice that the general market is not moving. One reason is that the market did open down due to bad data from overseas, plus the triple whammy of Bonds, Gold, and Dollar, all up at the open. Now this did not sway the dip buyers, they were able to recapture the breakeven levels in the major indices. Keep an eye on this triple whammy of TLT, GLD, and UUP that I mentioned above, if they gather to the upside simultaneously into the close, there could be further near term pressure on the equities. Also remember that it’s expiration Thursday for all European options, i.e. SPX/NDX/RUT, so make sure that you are managing any risk and get it cleaned up before the close. See you After Hours.

Trading is mixed again Thursday on a busy day of stock news. Cisco (NASDAQ:CSCO) drifted lower at the open after reporting earnings that topped Street estimates, but guiding revenue estimates lower for the third quarter. Heinz (NYSE:HNZ) surged 20 percent on reports Warren Buffett’s Berkshire is acquiring the food company. US Airways (NYSE:LCC) and AMR completed their long-awaited merger. Constellation Brands (NYSE:STZ) is up 37 percent on reports InBev is restructuring its pact with the company in order to get antitrust clearance for its deal to buy Mexican brewer Modelo. On the economic front, the only stat of the day showed Weekly Jobless Claims down 27,000 to 341,000 in the period ended 2/9 and much better than the 365,000 that was expected. The news seemed to help offset some of the anxiety caused by a report from Europe that showed economic growth in the Eurozone contracting at a rate of .6 percent in the fourth quarter. Equity markets are broadly lower across the region, but moving off session lows. Crude oil added 38 cents to $79.31 and gold lost $3.5 to $1641.5. On Wall Street, the Dow Jones Industrial Average is now down 14 points and tech-heavy NASDAQ lost 2.2 points. CBOE Volatility Index (.VIX) is down .15 to 12, and trading volume in the options market is picking up heading into the expiration later this week, with 3.8 million calls and 2.8 million puts traded through 11:30am ET.

Bullish Flow
Options on General Mills (NYSE:GIS) are busy on news peer Heinz is being acquired for $28 billion. The news seemed to spark interest in a number of other food-related names including P&G (NYSE:PG), Kellogg (NYSE:K), and General Mills. Options on GIS are seeing active trading. The stock is up $1.10 to $44.08 and new 52-week highs. April 45 calls are the most actives. 3,285 contracts traded. February 44 and April 43 calls on the stock are seeing active trading as well. Total volume is 12,000 calls and 650 puts.

Kohl’s (NYSE:KSS) is up 31 cents to $46.91 and options volume on the retailer through midday includes about 20,000 calls and 1,700 puts. The top trade is a 10,000-contract block of January 52.5 calls for $1.65 per contract. 11,000 now traded against 376 in open interest. July 46 calls, July 47 calls, Mar 46 puts, and Jan 50 calls on KSS are seeing interest today as well. Total volume is 4X the daily average and the increased interest comes ahead of the company’s Feb 28 earnings report.

Bearish Flow
Nuskin (NYSE:NUS) dropped $1.44 to $41.47 after Muddy Waters Research updated a negative story on the company and linked the story to an FTC Complaint file against the company. The stock is down in active trading of 2.7 million shares. By way of comparison, typical volume through midday is about 700,000. 5,860 puts and 925 calls traded on the stock. February 40 puts, which are 3.5 percent out-of-the-money and expiring after tomorrow, are the most actives. 3,849 contracts changed hands against 2,849 in open interest. Implied volatility is up 17 percent to 51.

KBR, a Houston, TX construction and engineering company, is up 28 cents to $31.59 and options volume on the stock is running 18X the daily average. 9,650 puts and only 5 calls traded on the ticker. March 25 puts are seeing the bulk of the activity. 8,911 contracts traded against 7,751 in open interest, which is already the largest block of OI in the name. The increased put activity comes ahead of the company’s Feb 20 earnings report.

Unusual Volume
Constellation Brands (NYSE:STZ) options volume is running 5X the (22-day) average, with 243,000 contracts traded and put volume accounting for 62 percent of the volume.

CenturyLink (NYSE:CTL) options volume is 15.5X, the average daily, with 112,000 contracts traded and call volume representing 54 percent of the activity.

NetApp (NASDAQ:NTAP) options volume is running 2X the average daily, with 50,000 contracts traded and call volume accounting for 55 percent of the activity.

Increasing options activity is also being seen in Heinz (NYSE:HNZ), Time Warner (NYSE:TWX), and Waste Management (NYSE:WM)

Implied Volatility Mover
Implied volatility in the options on Cisco Systems (NASDAQ:CSCO) is dropping in the wake of its earnings report. The stock is down 29 cents to $20.84 amid brisk trading of 40.5 million shares. Options on Cisco see heavy trading as well. 98,000 calls and 82,000 puts so far. March 20 puts and February 21 calls are the most actives. Meanwhile, implied volatility in the options on the stock dropped 38 percent to 17.5, falling below the 52-week lows seen last year when IV in CSCO briefly dropped to 18 in mid-March.

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