Hot Option Plays: Morning Rally Fizzled Due To Uncertainty In Italian Elections & Euro

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Cusick’s Corner 02-25-2013 After Hours
Gold, GLD, bounced in spite of a weak Euro, FXE, weak Equities, SPX, and strong Dollar. What is interesting is that this shiny metal typically is correlated to the Euro and today it is bucking the trend. This will have to be watched closely, let’s see if the Metals start to re-correlate soon. Outside of the Metals, the Commodity complex is also under pressure from the Dollar strength, UUP, and if this continues then this could be tough for the longs. This move was not one most would see today, but has to be respected after the grind that we have been in for the last month. See you Midday.

Stock market averages moved higher early Monday, but the rally fizzled and then sizeable losses were suffered on concerns about elections overseas. With no domestic economic news scheduled until home sales and consumer confidence tomorrow morning, some of the early focus was on the turmoil in Europe. Indeed, the euro took a decided turn for the worse against the dollar amid increasing uncertainty surrounding elections in Italy. According to the most recent reports, a hung parliament seems to be the most likely outcome from the elections and that, in turn, could potentially get in the way of unpopular reform policies designed to offer stability to the Eurozone. The euro, which had traded north of 1.33 early, was recently down to 1.305 against the buck. Treasury bonds finished sharply higher and gold gained $21.7 to $1594.5 amid flight safety buying. Crude oil is down 27 cents to $92.86. On Wall Street, the Dow Jones Industrial Average tumbled 216 points and the NASDAQ dropped 45.6 points.

Bullish
Texas Instruments (NYSE:TXN) slid 45 cents to $33.37 and eased of the 52-week highs seen early in the day amid weakness in the broader market to start the week. Options volume on the chipmaker was 4.5X the daily average. 43,000 calls and 6,850 puts traded on Texas Instruments today. The top trade was a 22,500-contract block of January 35 calls for $2.50 per contract when the market was $2.41 to $2.50. The hefty block of calls traded on the all-electronic International Securities Exchange and data from ISE indicate an investor bought the calls, to open a new position. At the end of the day, more than 35,000 contracts traded. The high volume in upside calls on TXN comes amid no news on the stock today and ahead of the company’s mid-quarter update, due out on March 7.

Bullish trading was also seen in Home Away (AWAY), Legg Mason (NYSE:LM), and Barnes and Noble (NYSE:BKS).

Bearish
Morgan Stanley (NYSE:MS) dropped $1.55 to $22.03 amid active trading of 29 million shares and options volume was 4X the daily average. In addition, put activity trounced call volume by a ratio of nearly ten-to-one. 203,000 puts and 21,000 calls traded on the investment bank today. One of the top trades was a spread, in which the investor bought 20,700 May 22 puts on the stock for $1.44 and sold 20,700 April 17 puts at 14 cents. The Apr 17 – May 22 put spread, for $1.40, might roll a position from April to May and/or it might reflect the view that MS might fall below $22 through the May expiry, but probably not drop to less than $17 through mid-April.

Bearish trading was also seen in Kimberly Clark (NYSE:KMB), Tyson Food (NYSE:TSN), and Apollo Group (NASDAQ:APOL).

Index Trading
Implied volatility was moving sharply higher across much of the options market Monday. The S&P 500 Index (.SPX) lost 27.75 points to 1,487.85 and CBOE Volatility Index (.VIX), which tracks the expected volatility priced into SPX options, surged 4.82 points, or nearly 35 percent, to 18.99. Meanwhile, the NASDAQ Volatility Index (.VXN) rallied 3.67 to 19.35 and implied volatility on the Dow, as measured by the Dow Jones Volatility Index (.VXD) rose 4.01 to 16.72. While much of the market’s decline and subsequent increase in volatility were being attributed to problems in Europe, anxiety levels might be escalating a bit ahead of the March 1 sequestration deadline in Washington as well.

ETF Action
Volume surged in the exchange-traded fund market place Monday. Total share volume in all ETFs (with listed options) was 1.3 million and significantly greater than the 877 million recent daily average. Meanwhile, 3.3 million calls and 5.1 million puts traded across the SPDR 500 Trust (SPY), iShares Small Cap Fund (IWM) and other products. The 8.4 million contracts is significantly more than the 5.2 million contracts of average daily volume seen during the past month, according to Trade Alert data. SPY, which is the exchange-traded fund that tracks the S&P 500, lost $2.89 to $149 per share and the thirteen most actively traded options across the entire market were SPY options contracts. Weekly 152 calls, which expire 3/1, topped the list. More than 310,000 contracts changed hands.

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