Hot Option Plays: 52 Week Highs After Hours

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Cusick’s Corner 01-18-2013 After Hours
It was quite a week — the S&Ps hit 52 week highs in spite of mixed earnings data. Domestic and global economic news have been the real driver this week – look at Housing Starts, New Claims (at levels not seen since 2008), and a retail market that has bounced back from the lows of 2012. This establishes a great discussion of longer term strength of the upside, but from a short-term perspective this has the markets getting rather extended. I mention this only because over the next few weeks there will be more discussion about the looming spending cuts if the debt ceiling is not raised. The way the market has been trading lately, it is discounting this issue. At least from the perspective that no one really believes that our elected officials will allow this issue get to the point where we have to write IOUs to seniors and soldiers — that’s potential political suicide. Monday is a holiday and it is a light data week so earnings will be the focal point. Have a great weekend and see you Tuesday.

Market action finished mixed on expiration Friday, as investors digested a round of earnings reports and a disappointing reading on consumer sentiment. The Univ of Michigan reported Friday morning that its index of consumer sentiment fell to 71.3 in January, from 72.9 and well below expectations of 75. On the earnings front, Intel (NASDAQ:INTC) was down 6.3 percent and the biggest loser in the Dow after the world’s largest chipmaker reported better-than-expected fourth quarter earnings, but offered in-line guidance for the first quarter. Capital One (NYSE:COF), Johnson Controls (NYSE:JCI) and Suntrust (NYSE:STI) were also down on earnings. Morgan Stanley (NYSE:MS), GE, and Schlumberger (NYSE:SLB) moved higher. Elsewhere, most of Asia’s equity markets post gains after GDP data showed acceleration in China’s economy. European markets were mixed and the euro gave back .5 percent to 1.317 on the dollar. Crude oil prices erased losses and added 6 cents to $96. Gold gave up $6.5 to $1684. On Wall Street, the Dow Jones Industrial Average saw a modest uptick midday on headlines that Republicans are looking to extend a debt ceiling deadline to mid-April. The move higher gathered some momentum into the close and the Dow added 54 points. The NASDAQ dropped 1.3 points.

Morgan Stanley (NYSE:MS) saw a flurry of activity Friday on the heels of its earnings report. The stock is up $1.63 to $22.38 on heavy volume of 59 million shares and new 52-week highs after results beat Street estimates. Options volume is running 4X the daily average, with 178,000 calls and 90,000 puts traded on the stock so far. The largest trades were part of a spread, in which the investor bought roughly 30,000 April 24 calls on MS for 70 cents and sold 30,000 January 30 calls (that expire in 2014) at 60 cents per contract. The spread, for 10 cents, appears to be opening because volume exceeds open interest in both contracts. The investor probably has a bullish view on the stock, but rather than buying the stock outright, they are buying options that give the right to call the stock for $24 through the expiration. If they exercise the calls (which typically wouldn’t happen unless the stock was trading for more than $24 in the market), they would then be holding a covered call (long the shares and short the Jan 30 calls). Moreover, by writing the Jan 30 calls, they seem to be stating that they don’t expect the stock to see a dramatic move beyond that level through the Jan 2014 expiration.

Bullish trading was also seen in Sears Holdings (NASDAQ:SHLD), Office Depot (NYSE:ODP), and Applied Materials (NASDAQ:AMAT).

Arch Coal (NYSE:ACI) was up 53 cents, or 7.5 percent, to $7.63 in very active trading of 28.5 million shares amid strength in the sector Friday. Other names in the space, like CNX, ANR, and JRCC, are also moving higher. Meanwhile, 21,000 calls and 27,000 puts traded on Arch coal so far today. The largest trade was a 20,000-contract block of February 7 puts on the coal producer for 25 cents per contract when the market was 23 to 25 cents. A buyer bought the puts, according to a source on the floor, and appears to be opening a new position. A total of 21,500 Feb 7 puts now traded on the stock against 1,393 in open interest. A shareholder with a large position in stock might have initiated the put purchase on concerns today’s rally won’t hold heading into the company’s earnings next month, on Feb 5.

Bearish trading was also seen in Huntsman Chemical (NYSE:HUN), Monster Beverage (NASDAQ:MNST), and AMD.

Index Trading
The plunge in the CBOE Volatility Index (.VIX) continues. The market’s so-called “fear gauge” lost another 1.18 to 12.39 and has dropped 45.6 percent in just three weeks. January 2013 options expired on the index Wednesday and the settlement value was 13.69. The index has dropped another 9.5 percent since that time. Since the index tracks the expected or implied volatility priced into a strip of S&P 500 Index (.SPX) options, the decline suggests that, all else being equal, the premiums for options on the S&P 500 have become much cheaper than three weeks ago. That fact doesn’t seem to be stirring up much activity in the SPX pit, however, as volume was relatively light today. 443,000 puts and 299,000 calls traded on the S&P 500 Friday.

ETF Action
SPDR Retail Trust (XRT) adds 33 cents to $65.51 and notched new 52-week highs today. Meanwhile, 73,000 puts and 9,055 calls traded on the ETF, which is 3X the daily average. One spread drove much of the volume, as an investor apparently bought 30,000 March 64 puts on XRT for $1.13 and sold 30,000 March 60 puts at 34 cents each. The Mar 60 – 64 put spread, for 79 cents, appears to be an opening position and one that would make its best profits if shares fall to $60 or less through the March expiration. An investor with a large portfolio of retailing names might have initiated the spread to help hedge the risk of a substantial market decline over the next eight weeks.

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