Hot Option Plays: China Watching Sequestration Midday

OptionsXpress
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Cusick’s Corner 03-04-2013 MiddayAfter watching the program “60 Minutes” last night, I now think that the Chinese are more worried about sequestration than we are in the US. If you missed that piece it was on the real estate boom in newly established cities in China that are becoming more of a potential bust, but I will let you draw your own conclusions on the piece. The reality is that the US Consumer spending is a huge driver in China, which as we know owns a ton of our debt, and if the Consumer slows, bonds start to fall in price; this could put stress on China and potentially the global markets. So the data this week will be a potential driver, i.e. ADP and Employment. Looking out at Tech, XLK/QQQ, there is continued pressure right now on the bigger names like AAPL/NFLX, but the NASDAQ has been able to hold support, $2700. In spite of the big cap Tech weakness if support is held at these levels, it could be a nice catalyst for Tech bulls. See you After Hours.

Stock market averages have pared morning losses and are little changed heading into midday Monday. With no domestic economic news to guide trading, some of the early focus was on overseas markets. Stock benchmarks were mostly lower across Asia, including a 3.6 percent drop in the Shanghai Composite Index, on reports Chinese authorities are taking steps to curb a rising housing market. Trading was uninspired across much of the Eurozone as well. Crude oil prices are down 82 cents to $89.86 and gold is little changed at $1571.5. On Wall Street, the Dow Jones Industrial Average is down 15 points and 45 points off session lows. The S&P 500 and the NASDAQ are flat. CBOE Volatility Index (.VIX) hit a high of 16.16 and is now down .25 to 15.11. Options trading volumes are very light. 2.7 million calls and 2.6 million puts traded through 12:00pm ET.

Bullish Flow
Seagate Tech (NASDAQ:STX) is up 42 cents to $31.90 and call volume on the storage device-maker outpaces put activity by a ratio of more than ten-to-one today. About 18,000 calls and 1,500 puts traded on the ticker so far. One spread trade is driving much of the activity, as an investor bought 7,500 Apr 35 calls on the stock for 69 cents per contract and sold 7,500 Apr 38 calls at 22 cents, according to a source on the exchange floor. That is, they bought an Apr 35 – 38 call spread on Seagate Technology for 47 cents, 7500X. This appears to be a new position because volume exceeds open interest in both contracts. If so, the spread trader is possibly looking for the stock to bounce in the short-term after losing 14.7 percent since earnings were reported on Jan 28.

MGIC (NYSE:MTG) continues an impressive rally. Shares of the mortgage insurance company are up 51 cents to $4.30 and have jumped 52.3 percent in the past three days. The stock is up on heavy volume of 22.5 million shares today on reports the company has plans to raise capital. On the options front, volume in MTG is running 3.5X the daily average. 23,000 calls and 4,900 puts so far. April 4.5 calls are the most active in the name. 6,765 contracts have changed hands so far.

Bearish Flow
Suntech Power (NYSE:STP), a Chinese solar energy company, is off 7 cents to $1.24 and options volume on the stock is running 2X the daily average. 9,900 puts and 2,375 calls traded in STP so far. March .5 puts, which are nearly 60 percent out-of-the-money and expiring in 11 days, are the most active. 2,420 traded. March 1 puts are also busy, with 2,269 contracts changed hands. Open interest in the March 1 puts on STP is 39,222 and the largest in the name. March .5 and 1.5 puts also have a lot of OI. Meanwhile, implied volatility in STP options is very elevated at over 280 percent. It seems like some investors are concerned about potential weakness in STP in the short-term and are taking positions in March puts (that expire in 11 days), possibly to help protect or hedge stock positions from additional losses. STP has lost two-thirds of its value since the highs of $3.68 in March of last year.

Williams Sonoma (NYSE:WSM) rallied to a morning high of $46.64 this morning, but has since erased the gains and is down 28 cents to $44.98. Options volume on the retailer is running 12.5X the daily average. March 46 puts are the most active in WSM. 2,240 contracts traded, including 1000 contracts for $1.10 per contract this morning when the stock was near session highs. The contract is now more than $1 in-the-money and the market on the March 46 put is $1.75 to $1.90. The increased interest in WSM puts comes ahead of the company’s March 7 earnings report.

Unusual Volume
CME options volume is running 10X the (22-day) average, with 45,000 contracts traded and call volume accounting for 52 percent of the volume.

MGIC (NYSE:MTG) options volume is 3.5X, the average daily, with 27,000 contracts traded and call volume representing 83 percent of the activity.

Huntsman (NYSE:HUN) options volume is running 3X the average daily, with 17,000 contracts traded and call volume accounting for 96 percent of the activity.

Increasing options activity is also being seen in Hecla Mining (NYSE:HL), GlaxoSmithKline (NYSE:GSK), and Yamana Gold (NYSE:AUY).

Implied Volatility Mover
Implied volatility in the options on Nustar Energy (NYSE:NS) is moving higher amid increased options activity in the San Antonio, TX oil and gas company. The stock is down 6.7 percent to $47.11 on heavy volume of more than 1 million shares (typical volume is about 165K) after getting whacked with an analyst downgrade. Meanwhile, options volume in NS is running 13X the daily average. 5,560 calls and 2,655 puts so far. March 50 calls and 45 puts are the most actives and implied volatility in the options on the stock jumped 58 percent to 28.

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