Holiday Cheer Hits Retail Options Plays

Best Buy and Gap attract call shoppers looking for a Christmas kiss.
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The few days after Thanksgiving usually mean robust buying in the nation's retail stores, and today it also meant buying in their stocks and call options as well.

Buoyed by strong numbers for the first full weekend of holiday shopping, retail investors were snapping up the call options of retail stocks, expecting to see the good tidings reflected in an increased stock price later this month. Interestingly, investors were sticking to in-the-money front-month calls, hoping to get a less expensive proxy for the stock price's rocket ride into the holiday season.

"I think retail investors like what they are seeing so far this weekend," says Scott Fullman, chief options strategist at

Swiss American Securities

, where he says retail trading today was active. "These good

weekend shopping numbers were a major news event and what option buyers were waiting for."

Among the most active of the retail stocks was electronic retailer

Best Buy

(BBY) - Get Report

, which was upgraded by

Prudential Securities

Monday to strong buy from accumulate. Best Buy's stock was at 62 1/2, up 4 5/8, after announcing it had struck a deal Monday with

Calico Commerce

(CLIC)

, an e-commerce software company, to place kiosks in Best Buy stores.

Best Buy saw heavy action in its front-month calls, mostly in its in-the-money strike prices between the December 50 and 65 contracts. Heaviest were the deep in-the-money December 50 calls, which traded 650 contracts at prices around 13 ($1,300). Those investors hoping to use the deep in-the-money calls for a cheaper ride on the stock's climb were already seeing some of that. The December 50s, while trading only 1/2 point above real value, had already climbed 3 3/4 ($375) this morning.

The Gap

(GPS) - Get Report

also saw heavy call activity, and like Best Buy, it was mostly in its in-the-money front-month calls. The Gap's December 40s were active on both fronts but the calls led the way with volume of almost 900 contracts.

The December 40 calls were just-in-the-money, as Gap's stock price climbed to 40 7/8, up 1 15/16 this afternoon. The price of the December 40 calls more than doubled to 2 1/2 ($250), up 1 3/8 ($137.50) today.

Amgen

(AMGN) - Get Report

, the biotech giant, saw a big rollout play that could have some bullish sentiment. Two similar blocks of near-the-money front-month calls moved at almost the same time.

About 2,990 contracts of the December 47 1/2 calls moved along with 2,950 contracts of the December 50 calls. With the December 50s looking like they were moving under some sell pressure, it is likely that the trader sold the 50s to buy the 47 1/2s, which were trading at around 2 7/8, or $287.50 per contract.

The move could have been to close out a short call position in the December 47 1/2s to avoid selling out of an underlying stock position with the stock down 1 3/8 to 48 at midday.

If Amgen sits below 50 until the Dec. 17 expiration, the short trade is a winner. If the trader had indeed bought the 47 1/2 calls and sold the 50s, he's still hoping for the stock to stay below 50, at least until expiration. Amgen has been on a tear since midsummer and recently hit a new high above 50.

Dark days ahead for the Dow?

Some options traders may think so. The sleepy options on the

Dow Jones Industrial Average

index saw some active put plays that could mean some people think the Dow could drop more than 10% by February.

The Dow Jones index was at 109.49, down .40 this morning, but traders were active in the puts even lower down the chain. The December 107 puts and the in-the-money December 112 puts were both active under what looked like buying pressure.

The February 96 and 100 puts were also active, trading 300 and 550 contracts, respectively. For the February 96 puts, which went out at 1 1/16, or $106.25 per contract, to be successful, the Dow would have to drop more than 1,500 points by Feb. 18, 2000.

Of course, all this put-buying could be a big hedge against an established long position in the overall market, which could be a continued sign of confidence in the blue chips.