Hot Option Plays: Bounce Holds After Hours

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Cusick’s Corner 02-27-2013 After Hours
The major indices were able to hold the bounce. The Dow Jones Industrials moved above 14000 and is now at new highs for the last year. This is after a challenge of the lows earlier in the week, 13,800 on the INDU, and this is really impressive with today’s move and breakout. This action resumes the move in both direction and pace. Tech, QQQ, has established support, $66 on the short-term and this is the level I will continue to watch if the current upside trend is challenged. My canary, Small Caps IWM, held consolidation low, $88.5 on IWM, and this is a catalyst for the Small Caps and also the market in the short-term. Lastly, Consumer Discretionary bounced, XLY, and as we discussed earlier this week, this is a barometer of the economy and strength to the upside. See you Midday.

Stock market averages moved higher through midday and extended the gains in afternoon trading to finish with very solid gains Wednesday. The economy was in focus early after a report on Durable Goods was down -5.2 percent for January and worse than the -3.5 percent that was expected. However, stripping out transports, orders rose 1.9 percent and significantly better than the .2 percent that was expected. Pending Home Sales were up 4.5 percent in January and also better than the 1 percent that was expected. Investor sentiment seemed to get a lift from comments from Fed Chairman Ben Bernanke as well. In a second day of Congressional testimony, the head of the Fed reiterated his view that easing and low interest rates are necessary until the employment situation improves. Elsewhere, Asia’s markets were mostly higher, but Japan lagged after the yen strengthened Wednesday. Trading was orderly across Europe and the euro edged up .6 percent to 1.335 on the dollar. Crude oil was little changed around $92.85 and gold gave back some of the big gains seen over the past two days. The yellow metal lost $19 to $1596.5. But on Wall Street, it was off to the races! The Dow Jones Industrial Average was up 75 points midday and finished up 175 points. The NASDAQ gained 32.6 points.

Bullish
EMC attracted increasing options activity Wednesday. The stock was up 34 cents to $23.28 on volume of 18.4 million shares. By way of comparison, average daily volume for the Hopkinton, MA data storage device-maker is 26. 4 million shares. Yet, while share volume was lackluster (which was the case throughout much of the equity market Wednesday), calls on EMC were busy. 22,000 contracts traded, which trounced the day’s put volume of less than 3,000 contracts. March 23 calls were the most active. 11,950 traded, including a flurry of activity for 44 and 46 cents per contract just after the opening bell. January 30, March 24, and April 23 calls were the next most actives in EMC today. There were no obvious headlines on the stock to explain the interest. Shares have not performed well lately, falling 9.4 percent since earnings were reported a month ago.

Bullish trading was also seen in Sprint (NYSE:S), CH Robinson Worldwide (NASDAQ:CHRW), and Marathon Petroleum (MPC).

Bearish
Whole Foods (WFM) was up $1.34 to $85.30 in active trading of 2.5 million shares and options volume on the stock was 4X the daily average, driven by two large block trades. Both traded within minutes of each other on the Chicago Board Options Exchange [CBOE]. First, a 16,200-contract block of March 92.5 calls traded on WFM at 10 cents per contract when the market was 10 to 14 cents. Then, 15,200 March 75 puts traded for 13 cents when the market was 7 to 13 cents. Looking at the activity, the two trades appear to be part of one large March 75 – 92.5 bearish risk-reversal for 3 cents. Whole Foods shares were up today, but have dropped 12 percent since earnings were reported on 2/13. A shareholder might have initiated a risk-reversal in the March options to help hedge or “collar” a holding of WSM shares on concerns about further losses over the next 16 days.

Bearish trading was also seen in United Healthcare (NYSE:UNH), Humana (NYSE:HUM), and Tibco Software (NASDAQ:TIBX).

Index Trading
Overall volume totals were light Wednesday, with about 14.6 million contracts traded across the exchanges, according to Trade Alert data. Average daily volume in the past month is 16 million. Trading was active in the index pits, however, and implied volatility fell sharply across many products. 785,000 calls and 958,000 puts traded on the S&P 500 Index (.SPX), CBOE Volatility Index (.VIX) and other cash indexes. The S&P rallied 19.05 points to 1,515.99 and VIX dropped 2.14 points to 14.73. The NASDAQ Volatility Index (.VXN) was down 1.57 to 16.34, Dow Jones Industrials Volatility (.VXD) sank 1.66 to 13.15 and Russell 2000 Small Cap IV (.RVX) was down 1.55 to 18.47.

ETF Action
Dow Jones Transportation Average ETF (IYT) rallied nearly 3 percent to $106.64 today on strength in the transport names like railroad, airline, and trucking companies. IYT, which is an exchange-traded fund tracking the DJ Transportation Average, is back within striking distance of the record highs of $107.16 seen a little over a week ago. Some investors are possibly bracing for a pullback, however, as options volume in IYT was more than double the daily average and very lopsided today. 7,114 puts and 595 calls traded on the fund. April 101, 102, and 105 puts were the most actives.

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