Euro Weakness Continues 05-17-2010

Cusick’s Corner
We need to build off of Friday’s discussion of the Euro. The viability of this currency is being tested (though not formally) in the market action this morning. The Euro is busting through the 1.235 level and making lows we have not seen in years. What is potentially more disconcerting is that Commodities, especially the Energies, are pulling back on what seems to be fears of some real consumption weakness. The movement in that segment is not a total product of the Euro, China is a major factor. It is important to watch this battle play out whether you trade currencies or not. This has also boosted the flow of the Dollar trade, bringing the greenback to new highs. See you After Hours.

Disappointing manufacturing data and ongoing concerns about the European debt crisis are weighing on Wall Street Monday. Stock index futures fell into the red pre-market on news the NY Empire State Manufacturing Index sank to 19.11 in May, down from 31.86 in April and much worse than the 30 reading that economists had expected. The major averages did open a bit higher despite the data, but then another wave of selling pressure surfaced mid-morning. There was no specific news behind the morning slide, but crude oil was falling to session lows below $70 a barrel and the euro, which had moved higher early, faltered once again – dipping towards 1.23 against the buck. The slide in the euro is once again shifting some of the focus to the precarious European debt situation, which is weighing on investor sentiment in the United States as well. The Dow Jones Industrial Average is down 125 points midday. Trading in the options market remains defensive, with about 4.5 million calls and 4.6 million puts traded at 12:30 ET.

Bullish
AMR, the parent of American Airlines, is up and calls are active on takeover talk. The chatter is unsubstantiated, but seems to have triggered a reaction. Shares hit a morning high of $7.49 in active trading. Meanwhile, in the options, about 23,000 calls and 3,365 puts had traded on the airliner by midday. Short-term speculators are focused on the May $8 calls, where 12,130 contracts changed hands. June 8, May 9, and May 7 calls are seeing active trading as well.

The CBOE Volatility Index (.VIX) added 2.50 to 33.75, as investor anxiety levels remain elevated following another round of losses on Wall Street Monday. In VIX options, a noteworthy trade is in the May 35 – June 37.5 call spread, which traded at 50 cents, 50000X on the CBOE. The same spread surfaced Monday and appears to be a position adjustment or a roll. That is, the investor is selling-to-close a massive position in the May 35 calls to buy-to-open a similar position in the June 37.5 calls. It’s probably an institution looking for a hedge should volatility continue to rise in the weeks ahead.

Bearish
Alcoa (AA) shares are down 3.9 percent to $11.88 and the biggest losers in the Dow Jones Industrial Average Monday. In options action, a noteworthy trade early Monday was a seller of 19,000 June 14 call options at 16 cents each. Open interest in the contract is 61,400 and 20,500 contracts had traded by midday. These investors might be offsetting existing positions and liquidating trades – i.e. giving up hopes on a move beyond $14 per share by the June expiration.

Staples (SPLS) is down 24 cents to $21.88 and put volume is picking up ahead of earnings, due out Thursday morning. 14,000 contracts traded, or 18X the expected for midday (compares to 340 calls). The action includes a June 21 – 19 puts spread that traded at 50 cents, 3600X on PHLX. Looks like 3600 of the 21s were bought at 75 cents while 3600 June 19s sold at 25 cents. May 22 puts are seeing interest as well, with 4,250 contracts traded so far.

Unusual Volume Movers
Select Sector Technology Fund (XLK) options volume is running 5X the usual, with 38,000 contracts traded and call activity representing about 97 percent of the activity.

Royal Caribbean (RCL) options activity is running 3X the usual, with 46,000 contracts traded and put volume representing about 46 percent of the volume.

Freddie Mac (FRE) options volume is running 8X the usual, with 30,000 traded and put volume representing 99 percent of the activity.

Agilent (A), KB Homes (KBH), and Psychiatric Solutions (PSYS) also have unusual volume.

Implied Volatility Movers
Netease (NTES) implied volatility is moving higher, as shares falter ahead of earnings later this week. Shares are down $1.07 to $32.18 and options volume is 5X the average daily. 8,075 puts and 430 calls traded. Implied volatility jumped 12 percent to 53 ahead of the results which are due Wednesday after market close.