Q2 Wrap Up Holding Market Steady 06-30-2010

Cusick’s Corner
The bulls are trying to build some momentum into the Midday, looking to get out of this oversold segment and push into the green. This has been challenged, with the shorts just pounding back these bulls, so watch the 1042 level on the SPX to hold if the long side is going to have any real chance. Watch the Euro, it is showing some support, potentially setting up for a rebound. This will bring some momentary solace to an oversold market but the down trend is still firmly intact, and you know what is said about fighting a trend… See you After Hours.

The major averages are holding modest gains, but the tone of trading remains cautious following another round of disappointing economic data. The action was quiet in Europe after big losses sustained Tuesday, resulting in some of the focus shifted to the domestic news. Economic data released early from ADP showed the US economy adding just 13,000 private sector jobs in June, which was significantly less than the 61,000 that economists had expected. The disappointing data comes two days ahead of the Labor Department’s monthly payroll report. Separate data, released 15 minutes into trading, showed the Chicago PMI falling to 59.1 in June, from 59.7 the month before. The number was in-line with expectations. Beyond that, it’s been a relatively slow news day. After tumbling 269 points Tuesday, the Dow Jones Industrial Average is up 5 points midday. The NASDAQ added 11. The CBOE Volatility Index (.VIX) lost 2.04 to 32.09. Options volume is respectable, with help from some end-of-quarter position squaring. Roughly 3.2 calls and 2.8 million puts traded at 12:30 ET.

Bullish
Anadarko Petroleum (APC), one of the partners in the rig that sank and triggered the Gulf spill, is trading down 10 cents to $36.57 and options action remains brisk, with 34,000 calls and 17,000 puts traded through midday. August 50 calls are the most actives and the action also includes an interesting trade in the November contracts, where an investor bought 5000 of the $40 calls and sold 5000 of the $27.5 puts. This bullish “risk-reversal”, at a $1.60 net debit, appears to be a contrarian bet. APC shares are down more than 50 percent since late April on concerns about regulatory scrutiny of the company’s role in the disaster.

Options action is picking up in Hershey’s (HSY), as takeover talk surrounded the name Wednesday morning. It’s unsubstantiated market chatter and shares are flat at $48.33. However, options volume picked up to 2.5X the recent average daily. 3,450 calls and 1,725 puts have traded so far. July 50 calls are the most actives, as some speculators are apparently taking positions on hopes for a rally beyond $50 before the July expiration (16 days).

Bearish
Large blocks of September Quarterly put options traded on the iShares Small Cap Fund (IWM) Wednesday. Quarterly options are contracts that expire at the end of each quarter and some institutions like to trade them because the options can offer a convenient tool for managing risk. For example, as the second quarter is now coming to an end, one institutional investor apparently paid 45 cents for the IWM September 47 – 52 – 57 put butterfly spread, 20000X. That is, with shares around $62, they sold 40,000 of the 52 puts for the body of the fly and bought half as many (20000) of both the 47s and 57 puts for the wings. The spread has a max pay-off if shares of the fund fall by $10 to $52 through the end of the third quarter, which equates to a 16 percent drop in the Russell 2000 Small Cap Index.

BP is up 85 cents to $28.52 and August puts and calls have been busy today. One investor sold 10,000 August 30 – 35 call spreads at $1.58 and bought 10,000 August 20 puts at 91 cents. The three-way spread has traded more than 22,000X and appears to exit a bullish position initiated Friday. Shares are up 5.6 percent on the week and this spread trader is probably opting to bank a quick profit now, rather than run the risk of seeing BP shares fall in the weeks ahead.

Unusual Volume Movers
Monsanto (MON) options volume is running 2.5X the usual, with 52,000 contracts traded and call volume accounting for about 55 percent of the activity.

AstraZeneca (AZN) options activity is running 13X the usual, with 35,000 contracts traded and put volume representing 93 percent of the volume.
XL Capital (XL) options volume is running 5.5X the usual, with 21,000 traded and call volume representing 72 percent of the activity.

Unusual volume is also being seen in General Mills (GIS), Human Genome Sciences (HGSI), and Starbuck’s (SBUX).

Implied Volatility Movers
Ford Motor (F) implied volatility is easing a bit after the automaker said it would pay $3.8 billion in cash to settle a debt to a health care trust. Some investors seem to view this as a sign of financial strength and shares are up 50 cents to $10.38. More than 110,000 calls traded through midday. Some premium selling is being seen ahead of tomorrow’s auto and truck sales numbers. Implied volatility in Ford is down 2 percent to 49.5.