Unusual Options Activity Review: CSCO, SD, MUR, WLT, POO, CAVM, KBH, RRC, .VIX, FXI

Posted March 26th, 2012 by Joseph Cusick in Unusual Activity

Friday's Bullish Trading
Cisco Systems (CSCO) adds 15 cents to $20.54 and is one of 19 Dow stocks holding gains heading down the home stretch of trading Friday. A noteworthy options trade on the networking giant Friday is a combination play, in which 8,000 June 19 puts traded on the stock at 45 cents and 8,000 Jun 22 calls for 34 cents per contract. Both blocks traded on the International Securities Exchange and data from the ISE is suggesting that puts were sold to buy calls and open a new position. If so, an 11-cent credit was collected for the bullish combo and the investor is probably a willing buyer of the stock for $19 per share, as they are writing $19 puts on the stock. However, they are also buying upside calls to participate if the stock moves higher rather than lower before the June expiration. This bullish risk-reversal on Cisco has traded 16000X Friday.

Bullish trading was also seen in Sandridge Energy (SD), Murphy Oil (MUR), and Walter Energy (WLT).

Friday's Bearish Trading
Polypore (POO), a Charlotte NC industrial equipment maker, is up $1.35 to $37 and options volume on the stock is 3X the daily average, being led by a put ratio backspread. In this trade, the investor apparently sold 2,500 June 35 puts on the stock at $3.20 and bought 5,000 September 22.5 puts for $1. The ratio backspread, which is also a diagonal spread for a $1.20 net credit, will offer its best payout if shares hold above $35 through the June expiration and then make a dramatic move lower by mid-September. The stock was trading for more than $74 in July 2011, but has been cut in half since that time on slowing demand for electric car batteries ñ one of the company's key products. The backspread seems to reflect concerns about additional losses in the months ahead.

Bearish trading was also seen in Cavium Networks (CAVM), KB Homes (KBH), and Range Resources (RRC).

Index Recap
CBOE Volatility Index (.VIX) is down .63 to 14.94 and, after several days of whippy action, is up 3.2 percent on the week. The top trades in the VIX pit Friday surfaced in morning action after one investor apparently bought 24,000 May 29 calls on the index at an average of $1.325 and sold 48,000 May 35 calls at 72.5 cents. This 1X2 call ratio spread is possibly a view that VIX may see a substantial move higher in the months ahead and settle near 35 at the May expiration, which would represent a substantial change of trend. The settlement value at the March expiration earlier this week was 14.55. That, in turn, was well below the February settlement of 20.44 and January of 23.64.

Analyzing the ETF Market
iShares China Fund (FXI) sees increasing options action Friday. FXI is off 3 cents to $36.91 on relatively light volume of 10 million shares and lost 4.8 percent on the week. The ETF has been weighed down by disappointing economic news, including a report released Thursday that showed a fifth consecutive month of contraction in manufacturing during March. FXI is a fund that holds shares of leading companies from Hong Kong and mainland China. Players in the options market are active in the product today. 44,000 calls and 62,000 puts traded on the fund so far. The top trade hit in morning trading when 32,000 June 32 puts printed at 57 cents per contract on the American Stock Exchange. A source on the AMEX reports that the block was sold. If so, it seems to be an opening play and to express confidence that FXI will hold above $32 through the expiration, or not fall more than 13 percent over the next three months.

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About Joseph Cusick

Joseph Cusick currently serves as the Senior Vice President of Education and a Senior Market Analyst for optionsXpress. Mr. Cusick seeks out common sense and technologically scalable educational pathways for self-directed investors of all experience levels. He is largely responsible for ramping up delivery of online and offline seminars to customers and potential clients worldwide. Prior to serving in his current role, Mr. Cusick immersed himself in the broker side of optionsXpress by managing his own book of business. Prior to joining optionsXpress, Mr. Cusick served as a market maker and portfolio manager at the Chicago Board of Options Exchange. Joseph is a graduate of Marquette University and holds his Series 4, 7 and 63 registrations with FINRA.

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