Unusual Options Activity Review: IP, WM, BTU, ONNN, AIG, DKS, FMCN, CAVM, VIX, XHB

Wednesday's Bullish Trading
International Paper (IP) was down 69 cents to $37.51 and options volume on the stock was 6.5X the daily average, with about 93,000 calls and 1,750 puts traded on the paper company Wednesday. One large three-way spread drove much of the activity after an investor sold 15,000 January 35 calls on IP at $3.85, bought 30,000 January 39 calls for an average of $1.575 per contract, and sold 30,000 January 43 calls at 35 cents. The activity in the January 39 and 43 calls looks opening (volume exceeds open interest). At the same time, looking at the trade history in IP suggests possible closing out positions in Jan 35 calls opened in September when the stock was around $35 per share. If so, the investor might be liquidating the January 35 calls on the heels of the recent rally and now positioning for further gains by opening a January 39 – 43 call spread on International Paper. The position adjustment comes ahead of the company's quarterly earnings report – due out October 25.

Bullish trading was also seen in Waste Management (WM), Peabody Energy (BTU), and ON Semiconductor (ONNN).

Wednesday's Bearish Trading
AIG shares gained 51 cents to $36.86, setting new 52-week highs, and options on the financial services company were busy Wednesday. 70,000 puts and 31,000 calls traded on the stock. The largest trades were part of a spread, in which the investor apparently bought 13,550 January 37 puts on AIG for $1.87 and sold 13,550 January 32 puts at 41 cents. Both legs of the spread appear to be new positions (volume exceeds open interest) and, if so, the spread seems to be targeting a drop in the stock through mid-January 2013. A shareholder with a stock position might have initiated the trade to help hedge the shares ahead of AIG's November 1 earnings report. The company has gained nearly 18 percent since earnings were last reported in early-August.

Bearish trading was also seen in Dicks Sporting Goods (DKS), Focus Media (FMCN), and Cavium Networks (CAVM).

Index Recap
CBOE Volatility Index (.VIX) saw a flurry of activity Wednesday. October options on the index expired Wednesday and the settlement value for the October contracts is 15.96 - quite a bit higher than the September expiration, when it was 14.03, but much lower than October last year's 33.15. Now, attention turned to later expiration months. A total of 1.17 million options traded in the VIX pit, including 834,000 calls and 337,000 puts. November 25 calls were the most actives. Volume was approaching 200,000 contracts. December 16 puts and January 21 calls on the VIX saw heavy trading as well.

Analyzing the ETF Market
SPDR Homebuilders Trust (XHB) added 52 cents to $25.91 and rose to its best levels since the middle of 2007 on the heels of Wednesday's bullish monthly housing data. Trading in the options on the ETF was busy. 32,000 puts and 11,000 calls changed hands. About two-thirds of the put volume was due to one advanced spread trade, in which the investor sold 10,000 December 23 puts on XHB, bought 5,000 December 22 puts and bought 5,000 December 24 puts. This 1X2X1 put spread is a type of strategy known as a butterfly spread and, if bought to open, would yield its best profits if shares fall back to $23 (middle strike) through the December expiration.

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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.