Hot Option Plays: Defense May Be The Best Offense After Hours

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Cusick’s Corner 02-21-2013 After Hours
I just left the floor of the NYSE where the market was under a little pressure all day. There was a noticeable, defensive posturing developing today and I recognized this when trading picked up out of Materials, XLB, and into Staples, XLP. The Small Cap action tipped this off and when you see this type of action in Staples (names that people go into in times of potential economic uncertainty), defense becomes the new offense. The move in the Dollar to the upside, UUP, only continued the pressure in the commodity space. Watch the Euro and the Yen as well; the test of the bulls could be upon us for the first time this year. I will also be at the ringing of the NYSE bell tomorrow; maybe I’ll get into the pits like the old days.

Stock market averages staged a late-day rebound attempt, but finished in the red Thursday. A round of generally disappointing economic news helped set the table for morning losses after a report released early showed jobless claims increasing by 20,000 to 362,000 last week. Economists were expecting 358,000. CPI was flat for January. A .1 percent increase was expected. A third report on January Existing Home Sales was at an annual rate of 4.92 million and mostly in-line with expectations. However, Philly Fed tumbled to -12.5 for February and well below expectations of 1.5. A final piece of data showed the List of Leading Indicators up .2 percent in January and below expectations of .3 percent. Overall, the data failed to cheer the somber mood left in the wake of yesterday’s FOMC minutes. The text released yesterday afternoon showed members becoming increasingly concerned about the risks of implementing QE3 through the remainder of 2013. European markets followed suit and were also weighed down by disappointing manufacturing numbers. Crude oil dropped another $2.34 to $92.88 on weekly inventory data. Gold is down $2.5 to $1575.5. Walmart (NYSE:WMT) was up 1.5 percent and the second best gainer in the Dow Jones Industrial Average (behind HPQ) on the heels of its earnings report. Still, the Dow was down 47 points and the NASDAQ dropped 33 points.

Bullish
Hewlett Packard (NYSE:HPQ) might help add some stability to the Dow Jones Industrial Average Friday. The computer-maker is one of the thirty companies within the Dow and is moving higher after reporting earnings in the afterhours. H-P reported an 82-cent per share quarterly profit, which trounced analyst estimates by 11 cents. Revenues also exceeded expectations and shares, which saw a late-day lift and added 2.4 percent to $17.10, are up to $18.20 in the After Hours. In options action, trading was brisk in HP ahead of the news. 98,000 puts and 93,000 calls traded in the name. Weekly 17.5 calls, which expire after tomorrow, were the most actives. 14,134 traded. If shares slide back to $17.5 or less by the end of business tomorrow, the contract will expire worthless. On the other hand, if shares hold above $17.5, the contract has intrinsic value equal to the price of the stock minus the strike price of the call option. At $18.20, for example, the intrinsic value is 70 cents ($70) per contract. The last print of the day for that Weekly 17.5 call was for 50 cents per contract.

Bullish trading was also seen in Vodafone (NYSE:VOD), Newcastle (NYSE:NCT), and Frontier Communications (NYSE:FTR).

Bearish
Chesapeake (NYSE:CHK) hit a morning high of $20.88 early after the natural gas company reported earnings before the opening bell. However, the gains faded throughout the morning hours and CHK lost a nickel to $20.19 on high volume of more than 20 million shares Thursday. In options trading, 15,000 calls and 43,000 puts traded on the stock. The top trade printed early in the day when 10,000 January 15 puts traded for 88 cents per contract when the market was 85 to 88 cents. At the end of the day, 12,174 contracts traded against 53,079 in open interest. An investor might have been short the puts and was covering the position after the earnings were out or, if today’s flow adds to the open interest, the activity might part of a longer-term hedging strategy against a stock position. $15 puts on CHK are 28.2 percent out-of-the-money.

Bearish trading was also seen in Kimberly Clark (NYSE:KMB), Tesla Motors (TSLA), and MGIC (NYSE:MTG).

Index Trading
There was a dramatic uptick in implied volatility throughout much of the index market Wednesday and the trend continued Thursday. CBOE Volatility Index (.VIX), which tracks the expected or implied volatility priced into S&P 500 Index (.SPX) options, rose from a five-year low of 12.31 Tuesday to 14.68 Wednesday, or 19.5 percent. The index was up another .54 to 15.22. Meanwhile, the NASDAQ Volatility Index (.VXN) gained 1.21 to 16.49 today. Implied volatility on the Dow, as measured by the Dow Jones Volatility Index (.VXD), was up .37 to 13.68. Crude oil volatility (OVX) jumped another 2.16 to 27.13, but gold volatility (GVZ) bucked the trend and eased back 1.89 to 16.90.

ETF Action
iShares Silver Fund (SLV) adds 14 cents to $27.73 and was steady Thursday after falling 9.6 percent over the past two weeks. Some investors are possibly bracing for additional losses in the white metal in the months ahead, as May 27 puts on SLV were busy today. 32,578 contracts traded against 467 in open interest. Much of the activity came in one big block after 30,750 contracts traded for $1 per contract when the market was 98 cents to $1. SLV is an exchange-traded fund that represents ownership in silver and therefore buying puts on the ETF represents a bearish view on the metal.

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