Hot Option Plays: The Squeeze Midday

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Cusick’s Corner 03-14-2013 Midday
The inverse of a bottom picker (I will stay away from any proctologist jokes this time) is a top picker. Right now this market feels like early shorts are being squeezed on the upside and many might be getting uncomfortable as this market continues to grind higher. I see this not only in equities where there are not a ton of shorts, but also in the volatility markets where some bears have chosen to play the upside in volatility by buying some VXX or outright futures potentially meanwhile the VIX only continues to fall. So the point is that this market has other catalysts to the upside at this stage that go beyond Central Banks and earnings. Last note, this is expiration Thursday for options that are European settled. For those of you with SPY positions, this ETF is going ex-dividend tomorrow. If you have March SPY call options that are at or near the SPY price, manage your risk today. See you After Hours.

Stock market averages are holding modest gains amid strength in global equity markets and better-than-expected economic data Thursday. Overseas, equity markets were mostly higher across Asia and also seeing gains across the Eurozone, including a 2.2 percent bump in Spain’s MIB Index. In the US, a report released early showed jobless claims declining by 10,000 to 332,000 last week. Economists were expecting an increase to 350,000. Separately, the Producer Price Index [PPI] was up .7 percent for February. Economists were expecting the gauge of wholesale inflation to increase .6 percent. Crude oil is up 17 cents to $92.69 and gold lost $3 to $1585.50. Next, attention shifts to bank stress test results after the closing bell. But trading is quiet, even as the Quadruple Witch quarterly expiration looms. The Dow is up 52 points and the NASDAQ added 7. CBOE Volatility Index (.VIX) is down .18 to 11.65. Overall trading in the options market is picking up due to the expiration. 3.3 million calls and 2.7 million puts traded through 11:30am ET.

Bullish Flow
Rite Aid (NYSE:RAD) is up 7 cents to $1.81 in active trading of more than 9 million shares and options on the stock are seeing unusual activity Thursday. 25,000 calls and 1,050 puts traded on the drugstore chain. The activity is concentrated in April 2 calls on the stock and the early activity included a buyer of 15,000 contracts for 15 cents per contract, according to a source on the exchange floor. More than 22,000 April 2 calls now traded in Rite Aid against 8,461 in open interest. It’s not clear what is motivating the activity, as there are no obvious company headlines in the name today. Yesterday, peer Walgreen saw relative strength and increased all activity on an analyst upgrade. WAG will report earnings on March 26.

Synaptics (NASDAQ:SYNA), a Santa Clara, CA mobile technology company, hit a morning high of $37.81 and was recently up 33 cents to $37.23. Options volume on the stock is running 4.5X the daily average. 6,400 calls and 300 puts traded on the stock so far. Much of activity is in the March 38 calls, as 4,111 traded against 141 in open interest. The top trade is 1000 contracts for 15 cents when the market was 10 to 15 cents. It appears to be call buying, but seems somewhat unusual. The contract is 2 percent out-of-the-money and expiring after tomorrow.

Bearish Flow
Morgan Stanley (NYSE:MS) sees unusual activity as well. Shares are down 10 cents to $22.68 and total volume in the options on the investment bank is 80,000 puts/13,000 calls. The flow is highly concentrated in March 22.5 puts, where more than 62,000 contracts traded against 1,957 in open interest. The top trade is a 37,000-contract block for 12 cents per contract. A buyer initiated the trade, according to a source on the floor. If so, a shareholder might be establishing a short-term protective put position ahead of the Fed’s second round of bank stress test results, due out after the closing bell.

Krispy Kreme (NYSE:KKD) is up 9 cents to $15.05 in relatively active trading of 990,000 shares and notching new 52-week highs today ahead of earnings, due out after the closing bell. Options on the stock are seeing active trading as well. 3,300 puts and 1,920 calls so far. April 13 puts, which are 13.6 percent out-of-the-money and expiring in five weeks, are the most active in KKD. 1,890 traded against 153 in open interest. March 15 calls, Mar 14 puts, and May 16 calls on the stock are also seeing interest and implied volatility in the options is moving up to 62, from 56, ahead of the results.

Unusual Volume
MGM options volume is running 4X the (22-day) average, with 69,000 contracts traded and call volume accounting for 65 percent of the volume.

Aetna (NYSE:AET) options volume is 9.5X, the average daily, with 62,000 contracts traded and put volume representing 99 percent of the activity.

Cheniere Energy (LNG) options volume is running 3X the average daily, with 34,000 contracts traded and call volume accounting for 60 percent of the activity.

Increasing options activity is also being seen in Suntech (NYSE:STP), Rite Aid (NYSE:RAD), and UltraPetroleum (NYSE:UPL).

Implied Volatility Mover
Implied volatility in the options on MGM is moving higher along with the stock price today. Shares of the casino operator are up 9.4 percent to $13.45 after Bloomberg reported that Kirk Kerkorian’s Tracinda Group is possibly looking to increase its stake in the company. The investment manager currently owns 18.6 percent of MGM and is considering an increase to as much as 25 percent. The stock is up $1.04 to $13.45 on blistering volume of more than 23 million shares. Meanwhile, 45,000 calls and 24,000 puts traded in MGM, which is almost 4X the daily average, and implied volatility rose 14.5 percent to 31.5.

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