VIX Drops 15% 06-02-2010

Cusick’s Corner
The VIX dropped even more in the afternoon -- falling 15% in today as the SPX rallied and came back from yesterday’s drop (see Index Trading). The morning appeared a little shaky but in the afternoon Energies, Financials and Materials started the broader market’s push even higher. There is a lot of data coming out tomorrow – ADP Employment Report, Continuing Claims, ISM Service Index, plus on Friday morning there is the Labor Dept. Employment Report for April. See you Thursday.

Stocks moved broadly higher with help from Pending Home Sales data and a rebound in the energy sector Wednesday. After falling 113 points Tuesday, the Dow Jones Industrial Average opened steady and saw a morning move higher after data showed Pending Home Sales up a better-than-expected 6 percent in April. With little other news to guide the action, the tone of trading stayed positive into midday. Then, another round of buying interest and short covering surfaced late and helped lift the Dow to a 225-point gain. The industrial average finished at 10,250, near session highs, with help from Chevron (CVX) and Exxon Mobile (XOM). Shares of many energy-related companies rebounded from recent losses after crude oil battled back from an early decline and rose more than $1 to $73.60 a barrel. The tech-heavy NASDAQ gained 58.7.

Bullish Flow
Devon Energy (DVN), an Oklahoma City, OK oil and gas company, was among the winners in the energy sector Wednesday. Shares gained $3.42 to $65.05 and options volume included 16,000 calls traded in the name. The volume represents more than double the usual and 10X the number of put options traded Wednesday. Short-term speculators were focused on June calls with strike prices ranging from 60 to 70. Some of the action appeared to be in reaction to unsubstantiated market chatter than Chevron (CVX) is eyeing DVN for a possible acquisition.

Commercial Metals (CMC), MEMC (WFR), and Hartford (HIG) also had bullish order flow.

Bearish Flow
Discover Financial (DFS), the Riverwoods, IL credit services company, gained 29 cents to $13.47 and DFS put options saw a noticeable uptick in options action Wednesday. 7,470 puts and 465 calls traded on the day. July 13 puts saw the most action. More than 5,600 traded and, with open interest of 1,524 and 70 percent of the trades hitting at the offer, it appears that put buyers were taking positions and bracing for DFS to possibly drop below $13 per share by the July expiration.

Bearish flow also picked up in Altria (MO), DISH Networks (DISH), and Discover Communications (DISCA).

Index Trading
The CBOE Volatility Index (.VIX) slipped Wednesday. VIX tracks the expected or implied volatility priced into S&P 500 Index (.SPX) options and has been moving higher in recent weeks, as demand for portfolio protection (SPX puts) has been on the rise due to the increase in volatility throughout global financial markets. Yet, Wednesday, as the S&P 500 rallied 27.7 points to close near session highs, the CBOE Volatility Index tumbled 5.37 points to 30.17. In the options market, a noteworthy trade in the VIX was an apparent buyer of 10,000 June 30 – 37.5 (1X2) call ratio spreads at 20 cents, which might be a bet that the volatility index will return to the upper 30s before the June expiration, which is in 13 days for VIX options.

ETF Trading
Select Sector Industrials Fund (XLI) added 75 cents to $29.69 and some players bought put spreads on the fund. XLI holds all of the industrial names from the S&P 500 Index and is down 10.6 percent over the past month. Some investors appear to be bracing for further losses in the short-term. The July 30 – 26 put spread traded more than 10000X. For example, in midday action, 1,000 June 30s traded at the $1.72 asking price while 1,000 June 26 puts traded on the 46-cent bid. The action has all the signs of a bearish spread with a max potential pay-off if shares fall to $26 or less by the July expiration.