Hot Option Plays: Stock Market Averages Finished With Solid Gains After Hours

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Cusick’s Corner 04-23-2013 After Hours
The After Hours started with a rogue AP tweet — the S&Ps immediately dropped and recovered which then brought back “Flash Crash” references. I mentioned earlier that we need to take a tempered approach, but overall the market was not harmed and strength to the upside in equities is firm. We saw beat up names, IBM/AAPL/FCX, gain interest before and after earnings. Volatility is dropping, ~6.25%, which starts to resonate complacency. I do not like the fact that offensive sectors, XLE/XLK/XLI/XLB, continue to lag the market so it is harder to conceive what will continue to catalyze the bulls. See you Midday.

Stock market averages finished with solid gains with help from earnings news and in-line housing data Tuesday. Netflix (NASDAQ:NFLX), Delta (NYSE:DAL), Texas Instruments (NYSE:TXN), Regions Financial (NYSE:RF), ARM Holdings (NASDAQ:ARMH), and Coach (NYSE:COH) were among the companies seeing shares move higher in the wake of their respective earnings reports. On the economic front, New Home Sales improved to a 417,000 annualized rate in March, up from 411,000 and mostly in-line with expectations. Crude oil erased its losses and is up 19 cents to $89.36. Gold dropped $7 to $1414. European markets scored solid gains after poor economic data seemed to spark hopes for an ECB rate cut, but Asia’s equity markets were mostly lower on poor reading from the China HSBC Flash PMI index. Back in the US, the Street was abuzz by news that AP’s Twitter account was hacked to post a bogus report about an attack on the White House. After a volatile reaction to the tweet, the market quickly rebounded and, at the end of the day, the Dow Jones Industrial Average was up 152 points – 2 points from its best levels. The NASDAQ added 36.

Bullish
Ford Motor (NYSE:F) might be a name worth watching Wednesday. The automaker is due to report earnings before the bell and trading in call options on the stock was very busy ahead of the news. Total options volume in Ford Tuesday was 168,000 calls and 50,000 puts. The top trades were part of a spread, in which the investor sold 19,500 Weekly 14 calls on Ford that expire on 4/26 at 6 cents and bought 19,500 Weekly 14 calls that expire on 5/10 for 13 cents per contract, according to a source on the exchange floor. The stock was up 30 cents to $13.36 Tuesday and the spread, for 7 cents, appears to be rolling. In other words, the investor had a bullish position in the Weekly 14s that expire at the end of this week. That position is being closed and a new position is being opened in the 5/10 Weeklys. In other words, the spread trader is basically buying an additional two weeks of time for the trade to play out.

Bullish trading was also seen in Occidental Petroleum (NYSE:OXY), Talisman Energy (NYSE:TLM), and Micron Technology (NYSE:MU).

Bearish
Puts on Waste Management (NYSE:WM) were busy ahead of its earnings. The company is also due to report tomorrow morning and the stock was up 17 cents to $38.70 ahead of the news. On the options front, 11,000 puts and 1,950 calls traded on Waste Management today. The top trades were part of a spread, in which the investor apparently sold 1,425 May 39 puts on WM at 95 cents per contract and bought 2,375 May 38 puts for 60 cents each. Looking at trade history and open interest in the two contracts, the activity appears to be a roll. That is, the investor had a position open in the May 39 puts on WM. They closed that position Tuesday and are now opening a new one in the out-of-the-money May 38 puts. 7,250 May 39 puts and 2,645 May 38 puts traded on the stock and 30-day implied volatility in the options on Waste Management was up 4 percent to 19.5.

Bearish trading was also seen in Lion Gate Entertainment (NYSE:LGF), Synovus (NYSE:SNV), and Atlas Pipeline Partners (NYSE:APL).

Index Trading
Trading was relatively active in the index market Tuesday, but well off the levels seen a week ago. In fact, last Tuesday, April 16th, was a record day for trading in the CBOE Volatility Index (.VIX) pit, as nearly 1.5 million contracts changed hands. Last Tuesday was the last day to trade VIX April options and so the expiration was one reason for the higher volumes. Today, VIX dropped .91 to 13.48 and 612,000 options traded on index on the day: 381K calls and 231K puts. VIX May 13 puts, May 20 calls, May 15 puts and May 15 calls were the most actives. Meanwhile, the S&P 500 Index (.SPX) added 16.28 to 1,578.78 to finish near session highs. It was a relatively quiet day in the SPX pit. 366,000 calls and 472,000 puts traded on the index.

ETF Action
SPDR Technology Fund (XLK) added 33 cents to $29.90 and call options on the ETF were busy for a second day. 26,650 XLK May 30 calls traded Monday, including a 12,584-contract block for 23 cents per contract when the market was 22 to 23 cents. May 30 calls were again the most active in the ETF, with another 11,530 contracts changing hands. June 29, June 31, and May 31 calls were the next most actives. Total volume in the product was 25,000 calls and 9,400 puts. XLK is an exchange-traded fund that holds all of the technology companies from the S&P 500. Apple (NASDAQ:AAPL) is the largest holding and accounts for almost 13 percent of the portfolio. The company is out with better-than-expected EPS and revenue numbers after the close. The company also announced an increase to its buyback program and a dividend increase, but the company’s outlook for next quarter was mostly below expectations. The stock is halted in the after hours and set to resume trading at 16:50 ET.

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