Wednesday's Options Report: CSCO, RTH, JCG, OMX, NYX, MSFT, YHOO

by: Interactive Brokers

Rebecca Engmann Darst co-authored this article.

(NASDAQ:CSCO) – Once bitten, twice shy…Option traders have heeded the past lessons of Cisco, one quarter after allusions from its CEO to a drop-off in US corporate IT spending overshadowed better-than-expected earnings, sparking a massive, 9% sell-off in its stock that infected other tech tickers as well. With Cisco due to report earnings after the bell today, the company’s shares are trading 2% higher at $23.76, and with more than 110,000 options in play, traders mindful of Cisco’s vulnerability to sales forecasts are positioning long volatility via the February 22.50/25 strangle. The price of this position at $1.02 offers relatively cheap exposure to a break below $21.48 or above $26.02. The same strategy has been deployed in the March contract, where the $1.72 spread implies an even broader break out of the range of the strike prices. Current front-month premiums reflect the market’s expectation of as much as a 9% up-or-down move on back of earnings.

(NYSEARCA:RTH) – Tomorrow’s release of January chain store sales will provide a telling snapshot of that 10% of all U.S. retail activity that is rooted in its ubiquitous mass-market franchises. Ahead of the numbers, options in the Retail HOLDRs Trust (RTH), whose components include Wal-Mart, Home Depot and, rate among the top 20 most active option families on our platform. Last Thursday, an analyst report forecasting that tax rebates and Fed rates would trickle down favorably to lower-end consumers and boost chain-store sales, resulted in a doubling of call volume on the RTH. Today, we saw a similar spike in bullish speculative activity in the RTH – this time involving puts. With shares holding on to a 1% gain at $92.02, put-side premiums fell sharply in early trading. This didn’t inhibit traders from looking to sell short puts at the February 90 strike for around $1.15 apiece – these selling on volume nearly 4 times the existing open interest. The resulting volume, which would seem to suggest traders banking on an upside surprise in chain store figures tomorrow, despite the fact that open interest shows nearly twice as many defensive put positions open as calls - represented 5 times the normal level of activity in the RTH.

(JCG) –J. Crew Group – Despite the buoyant bullishness in the chain-store retail space, the mood is somewhat faded for another catalogue retailer. We were interested to observe an acceleration in option volume in preppy clothier J. Crew to 3 times the normal level against a minor, .91% rise in its share price to $42.10. The company is due to report earnings on March 13, so any earnings-related plays would likely be consigned to the March contract, but today’s volume is roundly situated in February 40 puts, which were bought for $1 apiece on volume 4 times the normal level of activity. J. Crew’s current share price represents a 25% premium on the 52-week low.

(NYSE:OMX) – Shares in OfficeMax, the country’s third-largest office supplies carrier, are trading a modest .40% higher at $22.79 today. Last week, OfficeMax shares registered their highest reading in 6 weeks on no apparent news catalyst, and it appears that some traders may be playing on the flukiness of the occurrence by entering bear call spreads in the May contract. In the case of today’s trade, it looks like a trader bought 10,000 lots of out-of-the-money May 27.50 calls for $1.00 while selling a like amount of 22.50 calls for $2.70. The result is a so-called credit spread in which the trader doesn’t mind limiting the maximum profit to the $1.70 opening credit – times 10,000 lots in this case – realized if OfficeMax shares pull back below the price of the lower strike by expiration.

(NYSE:NYX) –A U.S. Justice Department briefing released yesterday suggested that self-clearing financial futures markets ould pose a threat to open competition. The briefing immediately cast fresh scrutiny on the regulatory approval of CME Group’s bid to buy the New York Mercantile Exchange, and we’re seeing the upshot of that doubt today in a 12% decline in the value of Nymex Holdings, owner of the would-be takeover target. With shares at $93.85, Nymex Holdings options are showing a 52% spike in implied volatility, as fresh buying in February put strikes as low as 80 and 90 reflecting aptly on the state of the market’s mood. We did, however, observe fresh buying and selling in February calls at the 90 strike, suggesting that volatility may be in force, with traders taking advantage of the 10% more anticipated price risk in Nymex shares over the next month to buy and sell straddles and strangles at close-to-the-money strike prices. Heading into today’s selloff, option traders held nearly twice as many open call positions as puts in Nymex Holdings.

(NASDAQ:MSFT) –Microsoft - The saga continues, meanwhile, in Microsoft/Yahoo. Shares in the software giant are flat-to-higher at $29.10 this morning, with 125,500 options trading actively in the first market hours. Mood in the front month contract shows traders eager to buy February 27.50 puts for around 23 cents in possible anticipation of further price haggling and regulatory pre-emption of its Yahoo takeover. In all, puts are out-trading calls by a narrow margin, contrasting directly with the overweight of open call positions in its overall open interest stakes.

(YHOO) – Yahoo! – Shares are treading water at $29.05, still stubbornly below that $30 threshold. But while this morning’s 800,000-strong volume shows 3 and a half times as many calls moving as puts, the volume does not appear to show resolution expectation of a higher price bid out of Microsoft. Heavy traffic in March and April calls at the at-the-money 30 strike is trading to the middle of the market, and on volumes well within existing pools of open interest, suggesting that some traders may be paring large positions at those strikes rather than positioning baldly for directional upside.