Hot Option Plays: Market Down But Not Out After Hours

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Cusick’s Corner 03-25-2013 Midday
While the selling seemed to have caught quite a few traders off guard, the market just chopped around for the remainder of the After Hours, with the S&P bound around 1450 & 1454. I did not like the close in the Transports, IYT -1%, which puts the onus on the longs to step up or doubt could potentially increase at this stage. Watch 1448 on the S&Ps as the next challenge area for the bulls and bears. See you Midday.

Stock market averages opened higher but fell into the red midday and continued to sport losses into the close Monday. With no domestic economic data to guide action, events in Cyprus continued to draw attention after the country reached a bailout agreement over the weekend. Cyprus agreed to trim the size of its banking sector in exchange for the 10 billion EU bailout. The euro ticked higher on the headline and reached 1.307 on the dollar, but has since come under fire and is down 1 percent to 1.2855. Stock market averages also erased morning gains. After moving to multi-year highs and back within striking distance of its all-time high of 1,565.15, the S&P 500 was down less than one point midday and closed down 5.02 to 1551.69. The Dow dropped 64 and the NASDAQ lost 10.

Bullish
Eldorado Gold (EGO) options are busy for a third day. Thursday’s activity in the Vancouver-based gold miner was focused on Apr and May 10 calls. It created 5,547 contracts of new open interest in the calls on the stock (compared to +217 puts). Friday’s flow surged to 55,000 calls and 3,800 puts traded in EGO. It was heavily concentrated in July 10 calls. More than 47K contracts changed hands and it created about 27K in new open interest. EGO closed off 15 cents to $9.61 today and options volume is 4X the daily average after 19,000 calls and 2,500 puts traded on the stock. July 10, May 10, October 12, and October 13 calls are the most actives. And there is still no obvious news on EGO to explain the recent flurry of options activity.

Bullish trading was also seen in IAMgold (NYSE:IAG), Veco Instruments (NASDAQ:VECO), and Centerpoint Energy (NYSE:CNP).

Bearish
Bank of America (NYSE:BAC) May 11 puts are the day’s most actively traded equity options contract. Shares finished down 16 cents to $12.40. Meanwhile, volume in May 11 puts on BAC, which are 10.9 percent out-of-the-money and expiring in 53 days, is approaching 80,000 contracts. Most of those puts traded in one big block of 73,590 contracts for 14 cents when the market was 13 to 14 cents. A large shareholder might have initiated a put purchase to help hedge or protect a stock position after the 9.9 percent month-to-date advance in the stock. Weekly 12.5 puts (expiring 3/28) are the second most actives in BAC today. More than 20K traded. Total volume is almost evenly split, however, with more than 198K call and 195K puts traded in the bank today.

Bearish trading was also seen in Curis (NASDAQ:CRIS), Emerson Electric (NYSE:EMR), and LiveNation (LVY).

Index Trading
It was another busy day in the CBOE Volatility Index (.VIX) options trading pit on the Chicago Board Options Exchange. The index hit a morning low of 12.39 and is now up .17 to 13.74. Over 619,000 calls and 141,000 puts traded on VIX. Early options trades on the index, when it was still south of 13, was a VIX April 20 – 25 call spread at 20 cents, 100000X. The investor sold the spread (selling 100K 20s and buying 100K 25s), according to a source near the VIX trading pit. The activity was probably closing, as the same spread was bought for 28 cents, 100000X, to open on Friday. That is, the investor had bought the spread, maybe to hedge the risk of a volatility spike this week, but then closed the spread when the headlines over the weekend proved less dire than feared.

ETF Action
SPDR Oil and Production Fund (XOP) dropped 23 cents to $60.17 and a 41,380-contract block of June 52 puts trades on the ETF at 69 cents per contract when the market was 68 to 71 cents. Open interest in those puts is 56,234 and the largest block of OI in the ETF. So, today’s activity is possibly closing. Separately, an April 52 – 58 put spread trades on XOP for 32 cents, 5000X. An investor bought the spread (bought 58s and sold 55s), according to a source on the exchange floor. The spread appears to be a new position and, if so, targeting a move lower in the energy sector over the next few weeks – maybe to help hedge a portfolio of energy names. 54,000 puts and 5,350 calls trade in XOP today, a ratio of more than ten-to-one.

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