Unusual Options Activity Review: S, KSS, CELG, LEAP, JCP, CDE, JOE, EWY, VIX, SPX, XLP, KO, PG

Tuesday's Bullish Trading
The largest equity options trade Tuesday was in Sprint Nextel (S). Shares were down 28 cents to $4.90 and a 75,000-contract block of January 2014 $7 call options traded on the stock for 63 cents per contract when the market was 58 to 63 cents. At the end of the day, more than 109,000 of these long-dated call options traded against 5,260 in open interest. The contract is 42.9 percent out-of-the-money and expires in roughly 16 months. It's not clear what motivated the increased activity, as there were no headlines on stock Tuesday and shares were modestly lower. For whatever reason, some investors seemed to be taking large positions in the options that give the right to buy (call) Sprint shares for $7 apiece (100 shares per call option) through the January 18, 2014 options expiration.

Bullish trading was also seen in Kohl's (KSS), Celgene (CELG), and LEAP Wireless (LEAP).

Tuesday's Bearish Trading
JC Penney (JCP) dropped $1.02 to $23.56 and has now lost 19 percent in just two weeks. In options action Tuesday, an investor sold a February 32 – 36 call spread on JC Penney for 29 cents, 14500X. The spread traded more than 15,000X on the day and is possibly closing activity. That is, the investor had initiated a bullish spread (buying Feb 32 calls and selling Feb 36 calls) when the stock was at higher prices. Now, after the recent decline, they are unwinding the trade (selling the 32s and buying the 36s) on diminishing hopes for a substantial move higher in JCP by the February expiration.

Bearish trading was also seen in Coeur D'Alene (CDE), St. Joe Company (JOE), and Callaway Golf (EWY).

Index Recap
Tuesday was a rather slow day with light news flow and not much volume or volatility. CBOE Volatility Index (.VIX) hit a morning low of 15.76 and then moved to midday high of 16.50 before falling again in afternoon trading and closing down .61 to 15.71. Volume in VIX, the S&P 500 Index (.SPX) and other cash indexes was about 316,000 calls and 416,000 puts, which is only about half the average daily volume for the index market, according to Trade Alert data. There's not much hedging activity being seen in the options market so far in October and this is interesting because it is one of the more historically volatile months of the year for the equity market.

Analyzing the ETF Market
A large trade surfaced in the SPDR Consumer Products Fund (XLP). Shares, which represent ownership in Coke (KO), Procter & Gamble (PG), and other consumer products names, were up 3 cents to $36.09 and 250,000 January 38 calls were bought on the ETF, in one block for 15 cents per contract. The hefty premium purchase will create the largest block of open interest in XLP and seems to reflect the view that shares will be trading north of $38 per share by mid-January 2013. The fund has performed well so far this year and is up 10.6 percent so far in 2012. A 52-week high of $36.4 per share was recorded a couple of weeks ago.

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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.