Quick VIX

This week the slow and steady market rally we have experienced this year has slowed even more, although the uptrend is still very much intact. One option trader is betting that the Nasdaq-100 is at a near term top at its current levels, and sold 8000 of the QQQ 69 calls expiring on 4/26 against a stock position for $0.91. This buy-write or covered call has a neutral to bullish bias to the market  meaning that it will profit if the QQQ stays around this level or moves higher. If QQQ is at 69 at expiration the stock position will breakeven but the option will expire worthless, showing a profit of $0.91. If the Nasdaq-100 declines then losses on the stock position will be offset by the $0.91 of premium collected on the options. Lots of traders and investors are having a hard time seeing how the market will be able to rally significantly higher from here in the near term and are concerned about the seasonal “sell in May and go away” trade that could pressure the market. If you are i...

Last week shares of Lululemon were sold hard after the company reported earnings in-line with expectations but guided lower after announcing a product recall. However this morning on option trader made a large bullish bet that the stock will be higher by January expiration. The trade was the purchase of 3942 62.5/72.5 call spreads for $4.07. The cost of this call spread was then financed by selling an equal number of January 50 puts for 3.52. This brings the net cost of the trade to $0.55, which is the trader’s total risk above 50. If LULU is above 62.5 then the trader gets long exposure to the stock all the way to 72.5. The catch is that the trader would be required to buy the stock at 50 if it is below that strike at expiration. This spread is conservatively bullish and suggests the trader believes LULU could be oversold after last week’s drop. The big question going forward is how will the recall affect sales? Lululemon expects EPS to drop next quarter as a result of the recall, bu...

Yesterday the S&P 500 was only down 0.5% but the VIX was higher by over 18%, showing that traders were exceptionally skittish after getting surprising news from Cyprus. A higher VIX means that there was increased demand for options. In most names the option trading was dominated by purchasers of out of the money puts to limit downside risk to long stock positions. But in Conoco Phillips we saw traders come in and buy large quantities of out of the money weekly calls to play a pop in the stock with minimal risk. The biggest trade of the day was the purchase of 9249 Weekly 60 calls for $0.21 with the stock at 59.35. This trade will profit if COP is above 60.21, 1.5% higher, by the close this Friday. Yesterday COP opened down 0.70% and immediately began trading higher. The weekly 60 calls opened at $0.08 and traded as high as $0.31 during the day. This highlights the benefit of weeklies, which is leverage. Because expiration is just days away the options are extremely sensitive to ...

One of the top performing sectors during 2013’s stock market rally has been energy. Due to a large supply of cheap natural gas and increasingly accessible crude oil America is well on its way to becoming a net energy exporter by 2020. One company trying to capitalize on this is Cheniere Energy. Cheniere is the only company currently allowed to export LNG and is in the process of building an export terminal. However the company is not expected to show any growth until 2015 at the earliest, which is when gas should begin flowing through it terminal. Nevertheless Cheniere is trading at all-time highs, which spurred one option trader to make a bearish bet on the stock. The largest trade of the day was the purchase of 5000 April 24/22 put spreads for $0.50 with the stock at 25.00. This fix risk spread will be worth $2.00, making $1.50 profit, if Cheniere is below 22 at expiration, and will incur its max loss of $0.50 if LNG is above 24 at expiration. This is a contrarian play that the sto...

Yesterday shares of Walgreens surged 4.2% on strong option volume to a new 52-week high after an upgrade from “neutral” to “buy” at UBS. The new price target was raised to $48 a share, but some option traders didn’t quite believe that. The biggest trade of the day was the sale of 10,000 April 42/43 call spreads for a $0.58 credit. This is a bearish trade that can make a maximum of $0.58 if WAG is below 42 at April expiration, and incurs its maximum loss of $0.42 if WAG is above 43. This trade is basically a simple bet that the stock will be lower than it is now come April expiration. This thinking contrasts that of the analysts at UBS, who said that despite the stock’s strong performance year to date and throughout 2012 it is a buy. Prior to yesterday’s pop Walgreen had been trading off of its 2013 highs, which led UBS to declare that now is an excellent buying time. The rationale behind the upgrade was that the Alliance Boots transaction has settled and will begin positively impacti...

Yesterday shares of Zynga popped 10% on rumors that it could be a takeover target. This set option traders into a call buying frenzy, with triple the average daily volume changing hands yesterday. One of the biggest trades of the day was the purchase of 1129 April 4.5 calls for $0.22 with the stock at 3.90. This is a bullish bet that the stock will close above 4.72 at April expiration, an increase of 21%. Last year Zynga traded up to a high around $15.91 per share before plummeting to close 2012 at $2.63, a loss of 83%. However, so far the stock is up 50% year to date making it a top performer. Traders like this call buyer were speculating yesterday that Yahoo could buy Zynga, which will a catalyst for the stock to continue its rally into April expiration. But is a buyout by Yahoo really in the cards? Marissa Meyer’s goal is to integrate Yahoo into its user’s daily habits, so the real question is does Zynga’s games fall under the category of daily habits? Yahoo does have a games site...

On Friday shares of Navistar closed up 11% to cap off an impressive 46% gain on the week. Thursday the truck and engine company reported fourth quarter earnings loss that was not as bad as expected. The company also announced a management shake-up and declared “our return to profitability is in clear sight.” Carl Icahn, who owns 11.8 million shares and has been lobbying for a management change, has been quick to endorse former COO and incoming CEO Troy Clarke, and the stock was upgraded to “overweight” at JPM and reiterated as a buy at Jefferies. However, option trading Friday was less optimistic, with the biggest trade being the purchase of 1,000 July 30/20 put spreads for a net debit of $2.00. This is a bearish trade that will profit if the stock is below 28.00, 20% lower, at July expiration. This trade was most likely done to protect gains from a long stock position instead of as an outright bearish bet. After a 45% rally in a week, protecting gains with a fixed risk spread like t...

Yesterday as the Dow made a new` all-time high for the third consecutive day one option trader made a bet that all-time highs will been seen in the S&P 500 by April expiration. The trade was the purchase of 50,000 April 160/161 call spreads for a cost of $0.13. This is bullish trade that risks $650,000 to make a potential $4.35 million if SPY is above 161 at April expiration. SPY is already up 8% year to date, and this trade bets that it has another 4% left to rally over the next 5 weeks. Why might this be the case? First off, there has been a slew of data surprising to the upside lately. This morning non-farm payrolls came in at 236,000 versus 171,000 expected, and last week ISM Manufacturing came in at 54.2 versus 52.8 expected along with the Chicago PMI which came in at 56.8 versus 55.0 expected. Second, Bernanke, along with Yellen and Dudley, have been reassuring investors that the Fed will continue to keep rates low for a while yet. This means that markets can rally on good ...

Yesterday call options on Bank of America were active on above average volume ahead of today’s bank stress test results. The biggest trade of the day was the purchase of 13427 March 12 calls for $0.20 with the stock at 11.85. This is a bullish bet that BAC will be above 12.20 (3% higher) on expiration next Friday. Bank of America is poised to pass the Federal Reserve’s stress tests with flying colors this time around, which could open the door to a possible dividend increase and stock buyback. Currently Bank of America is the best capitalized of largest American banks with a Basel III Tier 1 common capital ratio of 9.25%. 5% is the minimum required, which leaves Bank of America with a comfortable amount of excess capital, some of which analysts expect could be allowed to be returned to shareholders. Analysts at JPMorgan estimate that Bank of America could increase its dividend from $0.01 to $0.04 and buy back up to $4 billion in stock. However, news about possible dividend increases ...

Yesterday shares of Cree surged higher by nearly 15% after the company raised their forward guidance and announced the release of a new sub $10 energy efficient light bulb. One option trader made a bet that Cree’s future would not be that bright when he bought 9975 June 50 puts and sold an equal number of June 46 puts for a net cost of $1.86 and with the stock at 49.75. This is a bearish bet with a breakeven price of 48.14, 5.9% lower, at June expiration. In Yesterday’s press release Cree said “Over the last couple of years we recognize that the consumer is instrumental in the adoption of LED lighting, but we need to give them a reason to switch.” Their new product, a $9.97 40-watt LED bulb, is what they hope will convince the consumer to ditch their old inefficient incandescent bulbs in favor of these. The new bulbs will be sold exclusively at Home Depot where a 60-watt incandescent bulb costs $13.97. It is well known that LED bulbs use less power and last longer, but they have alway...

Yahoo shares jumped 3% on Friday as trader responded to news that Yahoo’s Marrisa Meyer is pulling a play out of Google’s book and eliminating unsuccessful products en-masse. Yahoo announced that it would eliminate its BlackBerry app, along with Yahoo App Search, Yahoo Sports IQ, Yahoo Clues, and Yahoo Message Boards. This new policy comes in conjunction with a change in Yahoo’s description of itself in its 10-K. The old description as a ”premier digital media company” has been replaced with “a global technology company focused on making the world’s daily habits inspiring and entertaining.” Traders liked the new “less is more” policy out of Yahoo and the bullish stock trading spilled over into the options market, with over 5 calls trading for every put. One of the biggest trades of the day was the purchase of 2500 July 24/26 call spreads for $0.45 with the stock at 22.00. This is a bullish bet that Yahoo will be above 24 .45 at July expiration, a 11% increase. The risk in this trade i...

Yesterday JC Penny reported what some are calling “The Worst Quarter in the History of Retail.” The company reported a quarterly loss of $2.51 per shares and that revenue dropped 24.8%. Revenue at stores open for at least a year fell 31.7% and customer traffic dropped 17% last quarter following a 10% decrease in third quarter. Not surprisingly these dismal numbers spurred option traders to make some large bearish bets on the stock. The biggest was the purchase of 30,000 May 16 puts for $1.57 with the stock at 17.50. This trade will be profitable if JCP is below 14.43, 17.5% lower, by May expiration. One of the biggest concerns investors should have in JC Penny’s cash supply. In November they told investors that they would end the year with $1 billion in cash, but ended up with only $930 million. Wednesday they then told investors that they had delayed $85 million in payments to their suppliers until the early part of the first quarter. This is another red flag that the company is run...