Equity markets end the month with a moderately lower session as ES futures rally through the day and close well off the lows. The market was under pressure today as emerging market concerns continue to weigh on stocks. Personal Income and Outlays was released this morning as well with data showing lower than expected growth in both personal income and spending. ES futures spent a shot time in positive territory before selling off into the close. Next week will see the release of the January employment situation and this number will undoubtedly be closely watched by traders and investors around the world.  Price action into the close indicates continuing concern over emerging markets and currency concerns. Traders likely trimmed long exposure due to headline risk over the weekend.  The first half of next week however does not see a lot of data releases so eyes will be on earnings. Earnings have been mixed with companies like MasterCard Inc. (MA) reporting below estimates while tech companies like Facebook (FB) have been performing well.  We remain long the market but have been establishing small shorts in weaker stocks.

Digital Generation, Inc. (DGIT) is a company engaged in the distribution of ad campaigns both online and on television.  The company’s stock is currently trading around $13.60 in a 52 week range of $5.78-$14.24. The stock performed very well last year with shares gaining just under 36% in the past 12 months. Options action in DGIT today suggests that traders believe the stock will continue this trend through September expiration. Early in the session a trader sold 2,000 DGIT Sep 15 puts for $2.77. This was labeled as an opening position and this sale of in the money puts represents some very bullish speculation.  While this may not seem like a large block this trade represents volume over 9 times the average daily option volume in DGIT. The stock is also trading well above the Ichimoku Cloud and the future cloud is upward sloping indicating the stock could have more room to the upside. We believe that the strong chart and very bullish order flow present a good opportunity for a long in DGIT with a price target north of $15.00.

Equity markets are trading lower through the open today as emerging market concerns continue to weigh on stocks. Personal Income and Outlays was released this morning as well with data showing lower than expected growth in both personal income and spending. December Chicago PMI was also released today coming in just above consensus estimates. Earnings misses by companies such as Mastercard (MA) add to the slide. Although futures are off the lows nearly all of the week’s gains have been erased. It seems likely that we will end the last trading day of the month in negative territory as traders sell into the weekend ahead of potential action by central banks around the word. Next week will not see very many economic data releases so attention will remain on emerging markets.  Through the next weeks we will continue to lean to the long side using relief days like yesterday as an opportunity to take profits.

A trader bought about 5,000 contracts of Hillshire Brands $HSH Feb 37 Calls for about $0.75 (62 times the usual volume) with stock at $34.70. Further, the stock stocks are up about 1.1% although overall stocks are down for the day in the US. The Hillshire Brands Company announced it will broadcast its review of second quarter and first half of fiscal year 2014 via the internet, live on Thursday, January 30, 2014 at 9:30 am CST.  This announcement may have played a role in the trader’s decision to purchase the large amount of options, perhaps upon positive knowledge regarding the upcoming earnings report. With order flow this strong we believe there is a very high level of probability the stock continues to rally through February expiration. (more…)

Auxilium Pharmaceuticals, Inc. (NASDAQ: AUXL) has gained over 13% since January 7^th 2014.  I normally approach stocks trading on their highs with caution.  However, when dealing with a pharmaceutical it is wise to examine the fundamentals to determine if the move is justified.  On January 8^th 2014 AUXL released interim data from its Phase 4 retreatment study (AUX-CC-862) evaluating XIAFLEX® and clearly the market like it.  This announcement coupled with the market’s reaction suggests investor’s belief in the drug and its potential to the company’s bottom line.  It is also possible the move higher is driven by short covering.  As a rule professional investors do not cover at the top unless they feel the company’s prospects have changed.   The action in the option market today points to a large player rolling the Jan 22 calls out to the Mar 25 calls which is bullish.  Given the option activity post announcement and the continued strength in the stock it is very possible AUXL will continue this move even if it’s at a slower pace.  I view any retracement in AUXL as an opportunity to establish a long position.  I further would use the 100 day moving VWAP (19.03 on 1/14/14) as my stop loss point, adjusting the stop each day.  This level is far enough below the market to give the position a chance, yet not so far as to risk unnecessary capital.

Trade: Long the AUXL March 25 Calls for 1.35
Risk: $135 per 1 lot
Reward: Unlimited

Natus Medical is up over 5% percent yesterday on a strong move following a conference call announcing an upward revision in the Q4 2013 revenue guidance.  BABY had a good beat of Q3 earnings based on growth in their neurology and newborn care divisions. The stock has rallied over 40% since October and is showing incredible strength despite disclosures of insider selling in the name.  BABY options are not traded with a large amount of volume, however there is a relatively large position open in the July $30 calls. This looks to be a rather large speculator seeing as these options are not cheap. Today’s move is impressive given the large amount of volume. It is on pace to at least double the daily average.

There was news in the name yesterday but a large share of the recent move has occurred with little to no headlines. This could signify some unknown positives in the name. Couple the move with the large open interest in the July calls and we could be looking at an excellent trading opportunity. Here we will look

Trade: Buy the BABY July 30 Calls for $3.10
Risk: $310 per 1 lot
Reward: Unlimited
Breakeven: $33.10

A trader bought 1,395 VTUS Mar 5 Calls for $0.60 (37.9 times usual volume) with stock at $3.86
A trader bought 1,992 ICLR Jan 40 Calls for $01.70 (11.6 times usual volume) with stock at $40.52
A trader bought 1,000 BG Feb 85 Calls for $0.90 (5.5 times usual volume) with stock at $81.62
A trader bought 4,000 EXEL Feb 8 Calls for $0.60 (8.3 times usual volume) with stock at $7.17
A trader bought  1,000 DLB Mar 40 Calls for $2.40 (23 times usual volume) with stock at $40.79

A trader bought 1,500 BONT Jul 11 Puts for $0.75 (18.3 times usual volume) with stock at $16.77
A trader bought 3,000 MAT Feb 44 Puts for $0.80 (5.6 times usual volume) with stock at $46.24
A trader bought 2,350 ECA Apr 17 Puts for $0.65 (3.2 times usual volume) with stock at $17.63
A trader bought 1,400 EMN Feb 70 Puts for $0.45 (3.3 times usual volume) with stock at $79.89

A trader bought 19,000 POT  Feb 33 Calls for $0.59 (3.8 times usual volume) with stock at $32.31
A trader bought 6,000 DANG Mar 11 Calls for $0.575 (5.7 times usual volume) with stock at $9.14
A trader bought 1,992 GLUU Jan 3 Calls for $1.20 (5.1 times usual volume) with stock at $4.14
A trader bought 10,000 ELNK Jul 6 Calls for $0.70 (14.8 times usual volume) with stock at $5.29
A trader bought 7,000 HA Feb 10 Calls for $0.70 (11.1 times usual volume) with stock at $10.21

A trader bought 4,100 RT Apr 5 Puts for $0.30 (9.9 times usual volume) with stock at $6.36
A trader bought 8,809 TSM Jul 15 Puts for $0.80 (5.7 times usual volume) with stock at $16.93
A trader bought 1,000 EGLE Jun 4 Puts for $1.15 (2.5 times usual volume) with stock at $4.19
A trader bought 1,757 RSH Feb 1 Puts for $0.05 (3.2 times usual volume) with stock at $2.60