Trade with Tight Parameters 05-25-2010

Cusick’s Corner
There are a lot of scared investors and traders out there today. We are seeing an enormous spike in emotion and the market seems to be reacting irrationally. While short-term solvency has come into question for some asset classes and countries, I have yet to see or hear a clear, rational message -- we appear to be looking into a great abyss. This means that right now the only option (no pun intended) is to trade this volatility and sentiment with extremely tight parameters. Watch Crude, CLN10, and the Aussie Dollar, ADM10, whereby days end you could see decent flow of upside positioning, especially with the amount of emotion that we have in the market at this stage. See you After Hours.

Global equity markets are under pressure Tuesday. In Asia, Japan’s Nikkei and Hong Kong’s Hang Seng both lost more than 3 percent on concerns about escalating tensions between North and South Korea. In Europe, the major averages remain under pressure, falling under the weight of a tumbling euro and worries about the ongoing sovereign debt crisis. Losses overseas set the table for weakness on Wall Street and overshadowed any domestic news of the day. Consequently, twenty-nine of the Dow thirty are showing losses. Home Depot (HD) is the only gainer and posting a modest gain. The Dow Jones Industrial Average is off 175 points. The NASDAQ lost 38. The CBOE Volatility Index (.VIX) gained 1.45 to 39.77. Trading in the options market is defensive, with about 5 million calls and 6.4 million puts traded at 12:30 ET.

Bullish
Genzyme (GENZ) is bucking the bearish trend. Shares jumped $2.55 to $51.03 after the FDA approved the company’s treatment for Pompe disease. Options action is heating up as well. 18,000 calls and 5,735 puts traded so far. The top trades include 4,000 January 2012 30 calls at $19.30 and 4,000 January 2012 60 calls on the $3.80 bid. The action looks like a substantial longer-term call spread, where an investor bought the lower strike and sold the higher strike. If so, they’re paying a hefty $15.50 per spread and taking a position in anticipation of additional gains in Genzyme shares in the years ahead.

Pfizer (PFE) is down 28 cents to $14.94 and 15,200 December 15 calls have traded. The top trade is a block of 6,750 contracts at $1.39 on the CBOE. It coincided with a block of 675,000 shares at $14.99 and appears to be part of a covered call. That is, the investor sold 1 call at $1.39 for every 100 shares bought at $14.99. This at-the-money call spread has a downside breakeven of $13.60 at expiration (excluding commissions) and potential maximum profits of roughly 10.3 percent if PFE closes at $15 or better at the December expiration.

Bearish
Eagle Rock Energy Partners (EROC), a Houston, TX oil refiner, is taking a hit. Shares are down $1.25 to $4.94, session lows, after the company updated its financials, including a series of moves to reduce debt. Apparently, investors didn’t like the news. Shares are reeling and more than 30K puts traded. June 7.5s are the most actives. 29,000 have changed hands so far, or about 60X the existing open interest.

Petrohawk (HK), a Houston, TX independent oil and gas company, is down 29 cents to $17.26. In the options, some investors are focused on June 17.5 call options. 14,180 have changed hands so far. Most of the action has come in blocks trading on the bid price, or between 76 to 87 cents per contract. It appears to be driven by premium sellers and, if so, the call writing reflects expectations of limited upside for HK in the weeks ahead.

Unusual Volume Movers
Freddie Mac (FRE) options volume is running 20X the usual, with 71,000 contracts traded and put activity representing about 99 percent of the activity.

Cameron International (CAM) options activity is running 2X the usual, with 33,000 contracts traded and call volume representing 63 percent of the volume.

DR Horton (DHI) options volume is running 3X the usual, with 25,000 traded and call volume representing 55 percent of the activity.

FedEx (FDX), Mens Warehouse (MW), and Autozone (AZO) also have unusual volume.

Implied Volatility Movers
Warner Chilcott (WCRX), an Ardee, Ireland pharmaceutical company, is off 58 cents to $22.54 and options volume is running 6X the average daily, on increasing interest in October 22.5 puts. 3,260 traded and implied volatility is up about 5 percent to 49. No headline to explain the action, but the activity seems to reflect some anxiety about the outlook for WCRX in the months ahead.