Volatility On The Move 06-24-2010

Cusick’s Corner
The bears were still in control going into the After Hours and were looking to test the lows. With the continued mixed data that has been coming out and the fact that Europe is still so very much in flux, the bearish sentiment looks to have the upper hand. Volatility is also on the move to the upside, trying to break 30, so premiums in the option world could be on the move as well. Brush up on your spread techniques to mitigate the potentially increased premium risk if you are positioned in this market. See you Midday.

Stocks finished broadly lower amid ongoing concerns about the global economic backdrop and problems in Europe’s debt markets. European stock benchmarks finished in the red after the cost of insuring Greek debt hit record highs. Spain’s IBEX lost 3 percent, Germany’s DAX fell 1.4 percent, and France’s CAC 40 slid 2.4 percent. Meanwhile, the day’s domestic news was a bit better than expected. Jobless Claims declined by 19,000 last week to 457,000 (vs. 460K consensus) and orders for Durable Goods slid 1.1 percent in May, which was also better than the 1.3 percent decline economists had expected. However, after two days of bleak housing data and fresh concerns about the European Debt Crisis, the tone of trading was cautious throughout the day. Selling pressure picked up late and the Dow Jones Industrial Average finished down 145 points, and 33 points off its worse levels. The tech-heavy NASDAQ lost 36.8.

Bullish Flow
Diana Shipping (DSX), an Athens, Greece worldwide shipping company, finished the day down 18 cents to $12.21 and options volume hit 2.5X the average daily, with 3,780 calls and 240 puts traded in the name Thursday. The bulk of the action was in the August 12.5 calls. 2,300 contracts traded. In addition, with 85 percent of the activity trading at the asking price and open interest of 864 contracts, it appears that premium buyers were initiating the trades. Shares are down 22.8 percent over the past two months and these investors might be buying the August 12.5 calls in anticipation of a rebound heading into the summer.

Bullish order flow was also seen in Staples (SPLS), CBS, and Wendy Arby’s (WEN).

Bearish Flow
Seagate Technology (STX) shares lost 65 cents to $13.66 and options volume rose to 2.5X the recent average daily, after about 30,000 puts and 15,000 calls traded on the storage device maker Thursday. September 15 and September 20 puts were the most actives and included some spread selling, as one or more investors appeared to be closing out positions in the 20s to open similar bearish positions in the 15s. Shares are down 34.2 percent over the past two months and these investors seem to be bracing for additional losses in the weeks ahead.

Bearish flow also picked up in Vivus Pharmaceuticals (VVUS), Microsoft (MSFT), and Potash (POT).

Index Trading
The CBOE Volatility Index (.VIX) rallied beyond the 30 handle late Thursday and finished the day up 10.5 percent to 29.74. Options activity picked up as well, with 192,000 calls and 50,000 puts traded on VIX. A good percentage of the call volume was due to one spread: a VIX July 40 – August 45 call diagonal spread, apparently bought at 15 cents, 50000X. That is, it appears that an investor sold 50,000 of the July 40 calls at $1.33 apiece and bought 50,000 August 45 calls at $1.48. The trade might roll (close July and open August) a bullish position from one month to the next. Or, it might be a bet that VIX (futures) will stay below 40 through the July expiration (7/21) and then spike above 45 before the August expiration.

ETF Trading
SPDR Retail Trust (XRT) saw bearish spread trading early Thursday. Shares fell 91 cents to $37.18 amid worries about the outlook for the economy and consumer spending. Put option volume in the fund surged to 97,000 contracts (compared to 7425 calls). The top trades included a July 37 – 34 (1X2) put ratio spread, where an investor apparently bought 10,000 of the higher strike and sold 20,000 of the lower strike. The bearish spread has a maximum pay-off if shares fall to $34 by the July expiration (22 days).