Hot Option Plays: Contrarians Say… Midday

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Cusick’s Corner 03-07-2013 Midday
We need to take a step back, turn off CNBC, look at a picture that is called the markets and take the view of a contrarian. In other words, block out the noise, i.e. the market is at all time highs/we are at resistance/puts are being gobbled up by retail, and just gaze. Now wake up and realize that when the world is calling for a market top, that is a positive for the Bulls. The market is continuing to run to the upside with mixed data and sequestration on our heels. Now that we are at levels that we have not seen since 2007, look at market sentiment, the Put/Call ratios. This could be a nice contrarian play to the upside. I still would only nibble but when the sentiment is this negative with the talking heads and traders, I like to look at the contrarian side of things. See you After Hours.

Stock market averages opened higher on jobs data and are holding the gains through midday Thursday. The Labor Department reported that jobless claims declined by 7,000 last week, pushing the four-week average to five-year lows. Other reports, on Trade Balance and fourth quarter productivity, were a bit worse-than-expected, but the weekly claims report seemed to hold more sway, as it comes ahead of key monthly payroll data tomorrow. Overseas, action was mixed throughout much of Asia and most major markets across Europe are holding modest gains on the heels of the latest ECB meeting. Crude oil prices rose 84 cents to $91.27 per barrel and gold gained $1.5 to $1576.5. On Wall Street, the Dow Jones Industrial Average is up 43 points and moving to new 52-week highs. The NASDAQ added 6. CBOE Volatility Index (.VIX) is down .36 to 13.16. Overall trading in the options market is running about the typical levels. 4 million calls and 2.9 million puts traded through 11:45am ET.

Bullish Flow
Gap Stores (NYSE:GPS) saw wild trading today. The retailer was scheduled to release same store sales results after the closing bell, but the numbers were apparently leaked early and, after a brief trading halt, the stock is now up $1.13 to $35.59 in active trading of 6.3 million shares. Options volume includes 20,000 calls and 9,400 puts. The largest trade printed early when the stock was 1.9 percent below current levels. A 3200-lot of Weekly 35 calls, which expire after tomorrow, traded for 25 cents per contract on the International Securities Exchange. An investor bought the calls, to open, according to data from the all-electronic ISE. Volume in the strike is now 5,300 contracts against 348 in open interest.

SPDR Financials (XLF) is up 12 cents to $18.18 and notching new 52-week highs today ahead of the release of stress test results for major banks, due out after the close this afternoon. Financials are broadly higher ahead of the results and options volume in XLF, which holds all of the financial-related names from the S&P 500, is double the daily average. 363,000 calls and 16,000 puts traded in XLF! More than 115,000 Weekly 18.5 calls, which expire 3/28, have changed hands. April 19, March 18, and May 19 calls on XLF are seeing high volume was well.

Bearish Flow
Petsmart (NASDAQ:PETM) drops $5 to $61.53 in active trading of 5.9 million shares after the retailer reported earnings per share that beat Street estimates, but revenues were in-line and the company lowered guidance for 2014 fiscal year. Options on the stock are busy as well. 8,350 puts and 3,255 puts traded in PETM so far. The top trade is a March 60 – 65 put spread that traded at $2.70, 500X. The spread has traded multiple times today, making the March 60 and 65 puts the most actives in PETM today. The activity is possibly closing, as the 65 leg of the spread is in-the-money after the drop in the stock today and open interest is sufficient to cover in both contracts. March equity options expire at the end of next week.

Steel Dynamics (NASDAQ:STLD) adds 15 cents to $15.60 and an August 14 – 18 strangle is bought on the steelmaker for $1.225, 5000X, to open. According to a source on the exchange floor, an investor bought 5,000 August 18 calls on STLD for 40 cents per contract and bought 5,000 August 14 puts for an average of 82.5 cents. If so, it’s not necessarily a bullish or bearish position, but expresses the view that STLD might make a substantial move higher or lower through the August expiration. Time decay is an important risk to consider when buying out-of-the-money options. Falling implied volatility typically hurts the long strangle position as well.

Unusual Volume
MGIC (NYSE:MTG) options volume is running 3.5X the (22-day) average, with 65,000 contracts traded and call volume accounting for 64 percent of the volume.

Boeing (NYSE:BA) options volume is 2.5X, the average daily, with 54,000 contracts traded and call volume representing 64 percent of the activity.

SPDR Utility Fund (XLU) options volume is running 7X the average daily, with 52,000 contracts traded and call volume accounting for 99 percent of the activity.

Increasing options activity is also being seen in Ciena (NASDAQ:CIEN), Pandora (P), and Symantec (NASDAQ:SYMC).

Implied Volatility Mover
Implied volatility in the options on Boeing (NYSE:BA) is climbing along with the underlying stock today. Shares are up $2.25 to $81.33, new 52-week highs, and the best performers in the industrial average today after Reuters reported this morning that the company’s battery testing is likely to get FAA approval soon. The stock is up and trading in the options on Boeing is brisk today. 36,000 calls and 21,000 puts so far. April 82.5 calls are the most active and 30-day implied volatility is up 12.5 percent to 20.

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