Stocks Under Pressure 05-19-2010

Cusick’s Corner
We are being barraged by headlines: Financial Reform bill up in the air. New fears of another BP rig. EU still in flux. Let’s cut to the chase. Strategically in this type of environment (higher implied volatility with bearish sentiment), consider looking at strategies like bear verticals and buying OTM call calendar spreads. There has also been brisk volume, so keep your eye on unusual moves and use the Dragon (under Toolbox) to look for large price and volume changes. For example, today in the Tech ETF, XLK, there was a huge spike in call activity. Start finding this type of activity on Dragon and then start investigating what it could potentially mean. While it’s not actionable at the start, it is a great idea generator.

Stocks finished in the red following another day of cautious trading in global equity markets Wednesday. Prior to the opening bell on Wall Street, equity markets were lower across much of Asia and Europe. In the US, the early focus was on inflation data, which showed the Consumer Price Index [CPI] falling .1 percent in April. Economists were looking for a .1 percent increase in the CPI. The Dow Jones Industrial Average opened lower on the signs of disinflation and on the weakness overseas. Then, the market came under additional pressure mid-morning after data showed the number of home mortgage foreclosures and delinquencies at 14 percent in the first quarter. The Dow Jones Industrial Average had fallen to session lows by late-morning and trading was choppy from that point forward. At the end of the day, the Dow Jones Industrial Average was down 67 points, but 119 from its worst levels. The NASDAQ lost 18.9.

Bullish Flow
Yamana Gold (AUY) shares fell 51 cents to $10.66 after gold (June) lost $20.60 to $1194 an ounce Wednesday. In the options market, volume rose to 3X the average daily, after about 54,000 calls and 8,400 puts traded on the gold miner. One player sold a position in 18,000 May 11 call options at 6 cents each to buy 6,000 July 11 calls at 73.5 cents. This strategist was probably exiting a large position in the May 11 calls because, after today, there are only two trading days until the May options come off the board. Next, they rolled a position to July, but with 6,000 rather than 18,000 contracts, or one-third the size. They might expect strength in gold, which rallied to record highs last week, to help lift shares of Yamana between now and July.

Newmont Mining (NEM), Quest Software (QSFT), and Bristol Myers (BMY) also had bullish flow.

Bearish Flow
Sony (SNE) shares bucked the bearish trend and added $1.31 to $31.73 Wednesday. There was no company specific news to explain the relative strength and some players seemed to be betting against the move. Total options volume rose to 4X the recent average daily, with 6,100 puts and 600 calls traded on the Japanese electronics maker. The action was concentrated in the June 30 puts, where 5,670 traded and 85 percent of the contracts hit at the ask price, suggesting put buyers were dominating the action. The premium buying helped send implied volatility in Sony options up 7.5 percent to 46.5.

Bearish flow also picked up in Analog Devices (ADI), Western Refining (WNR), and JP Morgan (JPM).

Index Trading
Trading in S&P 500 Index (SPX) options pit was very busy, as the index made a midday run lower and tested its 200-day moving average at 1,102 Wednesday. The index was able to hold the 1,100 handle and bounce up to 1115.05 at the close, down 5.75 points on the day. Meanwhile, the recent uptick in volatility stirred up a lot of action in the index market. About 1.46 million puts and 600,000 calls traded on the S&P 500. May 1150, May 1150, and May 1100 puts were among the most actives. The interest in SPX options was enough to help send the CBOE Volatility Index (VIX), which tracks expected volatility of SPX options, up 1.77 points to 35.32.

ETF Trading
IShares FTSE Xinhua China Fund (FXI) saw more action than usual. 304,000 options traded on the fund today. Shares finished down 7 cents to $38.37 and the top trades included 30,000 January 40 straddles at $9.55. That is, the investor apparently bought 30,000 January 40 puts at $6.10 and also bought 30,000 January 40 calls at $3.45. This massive premium purchase, which totals $28.65 million, appears to be a bet that volatility in China’s equity markets will remain high in the months ahead. It also has a bearish bias because the puts are already in-the-money and have greater negative delta when compared to the call options, which have positive delta. The overall delta of the position is negative.