Hot Option Plays: Market’s Current Built-In Velocity – Daily Markets
Cusick’s CornerHeadlines, poor data and the market still goes up. This is the velocity that I mentioned earlier this week — the direction that the market has the most fear built into it is — the upside. Going into expiration I am cleaning up my Sept exposure. I have some Euro positions that I am working out of, not adding any new positions for Oct at this stage but am looking at some Energy plays, XLE (thanks David), and some Retail, XRT, after a disappointing sales number, plus we are coming into the early holiday fall shopping season. As I mentioned over the past few Corners, if you have Sept positions on, get the risk tightened up, do not wait until the last minute. optionsXpress will present a free workshop in Denver on Saturday; if you want more info email us at education@optionsxpress.com. See you After Hours.
Stock market averages rallied at the open after the European Central Bank, the Federal Reserve, and three other central banks agreed to offer European financial institutions with dollar loans. The pledges of liquidity helped spark a rally in European shares before the start of trading in New York. A 3.3 percent advance in France’s CAC 40 helped pace the advance. The domestic news was less bullish. Data released early Thursday showed weekly jobless claims increasing by 11,000 to 428,000 in the period ended September 10. Economists were expecting a decline of about 7,000. The Consumer Price Index [CPI] rose .4 percent in August and twice as much as expected. Meanwhile, the NY Empire Manufacturing Index sank to -8.8 in September. Economists were looking for a decline of -4. Industrial Production for August was up .2 percent and .2 percent more than expected. However, the Philadelphia Fed Survey sank to -17.5 in September. Economists had predicted a reading of -10 from the gauge of manufacturing activity. Yet, news of intervention from central banks in Europe and the US overshadowed generally disappointing news on the domestic economic front and the Dow Jones Industrial Average is up 132 points at midday. The tech-heavy NASDAQ has added 23.5 points. CBOE Volatility Index (.VIX) lost another 1.58 to 33.02. Options volume is picking up heading into the options expiration. 4.8 million calls and 4.9 million puts traded across the exchanges through 12:30pm ET.
Bullish FlowA massive block of puts was sold on the SPDR Financial Fund (XLF). Shares are up 20 cents to $12.80 after shares of many of the banks rallied on news Central Banks in the US and Europe are offering European financial institutions with dollar loans. In options action, early trades in the XLF include a 73,000-contract block of October 11 puts at 18 cents per contract on the ISE. It was a liquidating trade, based on data from the exchange. Similar trades were seen October puts in a variety of sector exchange-traded funds including the SPDR Retail Trust (XRT), the SPDR Industrials (XLI), and the SPDR Metals and Mining ETF (XME). One or more investors were apparently closing out defensive or bearish positions on these exchange-traded funds, perhaps betting that Central Bank intervention into the banking sector will result in lower levels of market volatility in the weeks ahead.
An interesting spread trades in Temple Inland (NYSE:TIN) today. Shares are up 11 cents to $31.29 and one strategist bought 20,000 February 30 calls at $1.80 and sold 20,000 February 32 calls at 10 cents. In other words, a Feb 30 – 32 call spread is bought at $1.70, 20000X. The position looks opening and seems to be a bet that International Paper’s bid for the company will close before the February expiration. IP is offering $32 per share in cash for TIN and, if the deal closes before the Feb options expire, the spread will be worth $2, an increase of 17.7 percent. The risk is that the deal doesn’t go through and TIN remains below $31.70(breakeven of spread) through the Feb 2012 expiration. The entire debit is at risk (plus transaction costs) if shares fall below $30.
Bearish FlowDollar Tree (NASDAQ:DLTR) rallied to record highs today and is up $1.24 to $76. Options volume in the retailer is running 3X the daily average. 11,000 calls and only 290 puts traded in the name today. The top trade is a 6,645-contract block of October 80 calls, which was sold-to-open at $1.15. 8,827 now traded against existing open interest of 199 contracts. The flow is not necessarily bearish, but seems to reflect expectations that shares will hold below $80 (+5.3%) through the October expiration (36 days). Deutsche Bank initiated the stock with a Buy and an $81 price target today.
Quest Diagnostics (NYSE:DGX) sees relative weakness and increased options activity today. Shares are down $1.64 to $47.71 and options volume is running 19X the daily average, with 5,135 puts and only 10 call options traded in the name today. The top trade is a spread, in which the strategist apparently bought 2,400 Jan 45 puts on the medical laboratory company at $2.45 and sold 2,400 Jan 35 puts at 35 cents. In other words, they initiated a Jan 35 – 45 put spread for a $2.10 net debit and seem to be expecting additional weakness in shares through January 2012. No news on the stock to explain the losses and bearish flow in DGX today.
Unusual VolumeNetFlix (NASDAQ:NFLX) options volume is running 3X the (22-day) average, with 173,000 contracts traded and put activity accounting for 51 percent of the volume.
Temple Inland (NYSE:TIN) options volume is 3X the average daily, with 58,000 contracts traded and call volume representing 99 percent of the activity.
Tiffany (NYSE:TIN) options volume is running 7X the average daily, with 50,000 contracts traded and call volume representing 97 percent of the total volume.
Increasing options activity is also being seen in Best Buy (NYSE:BBY), Ecolab (NYSE:ECL), and Express Scripts (NASDAQ:ESRX).
Implied Volatility MoverUBS is down $1.40 to $11.28 and falling to new 52-week lows on news a rogue trader has cost the bank approximately $2 billion losses. Meanwhile, options volume in UBS is running 14X the daily average. 12,000 calls and 10,000 puts traded in the name so far. October and December 12 calls are the most actives. Implied volatility in options on the Swiss bank is up about 6 percent to 73.