Options Outlook: Amazon, Apple and the Dollar

The flurry of quarterly results is set to continue in the coming week and options trading volume has been pointing to a number of earnings plays that are on the radar of traders.

"We’re seeing a lot of activity in options ahead earnings," says Scott Fullman, director of investment strategy for IA Englander & Co. "Speculators are using options instead of the actual shares of a company.  It allows them to more easily play both sides of the market if they wish.  Options also provides leverage and the potential loss may be a lot smaller then they would risk in buying underlying securities".

On the earnings front in the coming week, Amazon.com will post its quarterly results Tuesday after the bell. The last time it posted earnings, three months ago, Amazon surprised with stronger than expected earnings which sent the stock soaring from the $45 level to above $60 in two days.  Thus far for August contracts, put volume has slightly outpaced call volume with open interest in puts out numbering calls by a margin of 72,000 put contracts to 64,000.  A number of bullish speculators who were hoping Amazon would rise to above $80 were left holding worthless calls as July calls with strikes above 72.5 finished worthless on expiration Friday.

Open interest measures the number of outstanding call and put positions.

Apple earnings are due after the bell Wednesday and options trading has been overwhelmingly bullish as Apple continues to reach further up into record high territory.  Apple's put-to-call ratio is at 0.35 as open interest on calls swamps the puts on the stock. Options volume on Apple has been averaging over 200,000 contracts a day.

Traders have been so bullish on Apple, that some have been accumulating the January 250 calls, a call that would become in-the-money only if the stock were to reach $250 by expiration in January.

In the August contracts, call open interest is above 10,000 contracts on strike prices up to  170.  Not everyone, however, is a complete Apple bull as options buyers were busy Friday positioning themselves in the 125 puts.

Currency Options Suggest Dollar Decline May Accelerate

Options are not only available on stocks, but on a variety of underlying assets including  currency futures.

The dollar has been pummeled, especially in recent weeks on concerns that subprime problems could weaken the U.S. economy enough to force the Federal Reserve to eventually cut rates even as central banks overseas are lifting interest rates.

The euro has been hitting record highs in recent days, the British pound has been trading at multi decade highs against the dollar and the Canadian and Australian currencies have also been strong against the greenback.

"It seems the dollar can do nothing right these days," says Andrew Wilkinson, chief strategist at Interactive brokers.  "While currency journalists must continually revise the peaks to highs made by Australian, British and Canadian currencies, options traders have been quietly building positions banking on further weakness in the dollar through the use of call options on these currency futures".

Wilkinson says options players have been scooping up pound September call options with a $2.06 strike, pushing open interest up more than 6-fold in a week.  He calls that kind of activity, "unbelievable".

Not to be left out, open interest in at-the-money calls on the Canadian dollar more than doubled during the past week, while open interest in calls on the Australian dollar futures surged by more than 8-fold.

There has also been what Wilkinson calls a "buying frenzy in Japanese yen currency options" as traders accumulate September yen futures with a strike price of 82.5.

Wilkinson says, "such positioning, excluding the yen, would smack of trades designed to benefit from a widening interest rate differential against the dollar."  But he adds that, "we’re also seeing this in the low-yielding yen, which hints to us that the dollar’s weakness is perhaps set to accelerate."

© 2009 CNBC.com