Hot Option Plays: Watch Michigan Sentiment After Hours

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Cusick’s Corner 02-14-2013 After Hours
It is expiration and we are going into a long weekend so right now no one is stretching, meaning there is no appetite to challenge the choppy, range-bound action. The Grains, JJG, did continue to track on the downside. Keep an eye on the softs, especially if there is a volume pop on this move down but at this stage we have not seen the volume. Watch the Michigan Sentiment after the open tomorrow; if consumption is under pressure then we could get some early volatility. See you Midday and make sure you are shoring up any February expiration risk.

Investors shrugged off poor economic numbers from overseas and stocks finished mixed Thursday. A report showed economic growth in the Eurozone contracting at a rate of .6 percent in the fourth quarter. Japan’s GDP dropped .4 percent during the same period and contracted for a third straight quarter. Meanwhile, Cisco (NASDAQ:CSCO) drifted lower at the open after reporting earnings that topped Street estimates, but guiding revenue estimates lower for the third quarter. However, Heinz (NYSE:HNZ) surged nearly 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) was up more than 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 weak GDP numbers in Europe and Japan. Meanwhile, crude oil added 33 cents to $79.26 and gold lost $9.5 to $1635.5. On Wall Street, the Dow Jones Industrial Average was down 14 points midday and lost 10 on the session. The NASDAQ added 1.8 points.

Bullish
Hewlett Packard (NYSE:HPQ) added 2 cents to $17.03 on relatively low volume of 13.5 million shares. By way of comparison, average daily volume in the stock is about 23.5 million. But call options on the computer-maker were busy. Total volume in H-P today was 71,000 calls and 15,000 puts. The largest trade was a 17,000-contract block of March 18 calls for 40 cents per contract when the market was 38 to 40 cents. At the end of the day, 28,500 March 18 calls traded on the stock against 8,191 in open interest. The activity comes ahead of the company’s earnings report, one week from today. Shares dropped 12 percent on 11/20 to $11.71 when the company last reported earnings, but has made up the loss and a lot more since that time. Implied volatility in HP options rose 5 percent to 43 and is in the upper end of the recent range (23 – 50.5), as the options market seems to be “pricing in” the prospect of additional volatility around the next earnings release.

Bullish trading was also seen in Kohl’s (NYSE:KSS), Waste Management (NYSE:WM), and General Mills (NYSE:GIS).

Bearish
AMD finished flat at $2.75 and options volume on the chipmaker today was 21,000 puts and 5,000 calls. The top trade: an 18,000-lot of April 2 puts for 7 cents per contract on the International Securities Exchange. An investor bought the puts, according to data from the all-electronic ISE. At the end of the day, 18,553 AMD Apr 2 puts traded against 10,624 in open interest. It’s not clear what motivated the interest in the puts, as the contract is 27.3% out-of-the-money and AMD has been drifting quietly higher since hitting 52-week lows of $1.81 in mid-November. Today’s put buyer might be hedging stock on concerns the gains will be lost in the weeks ahead.

Bearish trading was also seen in KBR, Nuskin (NYSE:NUS), and Crocs (NASDAQ:CROX).

Index Trading
CBOE Volatility Index (.VIX) ticked a bit higher at the open and hit 13.22, but the gains didn’t stick and the index lost another .32 to 12.66. The index is once again probing the 52-week lows of 12.29 seen in mid-January. One reason for the decline in the market’s “fear gauge” is probably due to the very low actual volatility seen in the market this week. Even with expiration Friday looming, the S&P 500 (SPX) traded in a 9-point range today and added just 1.05 to 1,521.38. The average daily move in the S&P this week has been just 1.3 points. The biggest move was the 2.42 advance two days ago. While VIX is considered an indicator of investor sentiment, it also tracks the expected or implied volatility of SPX options. And the very low levels of realized SPX volatility are often an important determinant of the implied volatility priced into the options on the index. In other words, one reason VIX is low is because there’s not much real volatility in the equity market today.

ETF Action
SPDR Financials (XLF) adds 6 cents to $17.84 on relatively light turnover of 31 million shares Thursday, but calls on the ETF were busy today. More than 230,000 contracts, which is almost 3X the expected activity, and compares to put volume of 85,000 contracts. One player bought a 41,200-lot of April 18 calls on XLF for 31 cents per contract. At the end of the day, 57,458 XLF April 18 calls traded on the day, making it the most 8th most active options contract on the day. Some of the activity might be rolling out of March 18 calls. Total volume in the contract was 131,220, making it the day’s most actively traded option across the exchanges Thursday.

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