Bears In Control 07-06-2010

Cusick’s Corner
While the market did hold some gains, it became very apparent who is in control of this market -- the bears. It is worth taking a look at the safety trade, Bonds, specifically TLT, TIP, and LQD are on a tear. If you look at TLT which is the iShares Barclays 20+ Year Treasury Bond Fund, it has broken resistance of $100, even in the face of long term rates under 3% (there could be more bull call spreads coming to light if $100 is held). Volatility is also on the move and it’s now at a moderate level that when mixed with this down trending market, could start to shake out weak longs. This could also pique the interest of longer term buyers who use options, strategists could be buying longer term out of the money calls and selling near term calls. This strategy attempts to take advantage of the bearish trend in the front month while also using the decay to reduce the cost basis of the longer term option until the trend potentially shifts down the line. The strategies mentioned above fall under the categories of call calendar and diagonal spreads, which in the examples above can be considered if your sentiment on direction is bullish and on volatility is high. Check out Education Center to learn more about these strategies. See you Midday.

Stocks finished with modest gains on a relatively slow news day Tuesday. The table was set for early gains on Wall Street after stocks moved broadly higher across Europe and Asia. Overseas markets responded to news the Bank of Australia left rates unchanged and voiced optimism about the global economy. In the US, there was little to guide the morning action after the three-day break. The focus then shifted to the ISM Services Index at 10:00 ET. It showed a decline to 53.8 in June, from 55.4 in May and well below economist estimates of 55. While there was little immediate reaction to the numbers and the Dow Jones Industrial Average was up more than 100 points midday, selling pressure surfaced in afternoon action. The Dow was in the red heading into the final hour. Then, a modest round of buying interest surfaced heading into the closing bell. At the end of the day, the Dow finished up 58 points and snapped a seven session losing streak.

Bullish Flow
Home Depot (HD) shares slipped 42 cents to $27.34 and options volume in the home improvement retailer rose to 3X the typical levels. About 72,000 calls and 10,000 puts traded in the name Tuesday. One noteworthy spread surfaced late in the day when an investor paid 59 cents for the August 29 – 33 call spread, 10000X. They paid 64 cents for the 29s and collected a nickel on the 33s. The spread traded 20000X total and is a bullish short-term play, as it makes its best profits if shares of Home Depot rally to $33 or more by August 21.

Bullish order flow was also seen in CSX, Genworth (GNW), and Campbell Soup (CPB).

Bearish Flow
CBOE Holdings (CBOE), owner of the Chicago Board Options Exchange [CBOE], saw increasing options action. Shares have been publicly traded since June 15 and options were listed on June 21. Some investors were active in the contract Tuesday. 7,190 puts and 1,675 calls traded. Shares lost $1.06 to $29.80 and July 30 puts were the most actives. 6,440 traded and some investors might be buying puts as a short-term hedge against recently purchased shares. July options expire in 10 days.

Bearish flow also picked up in Ctrip.com (CTRP), Paychex (PAYX), and Analog Devices (ADI).

Index Trading
Options activity picked up a bit in the index market after the holiday. It was a relatively volatile session, with the S&P 500 Index (.SPX) trading in a 24-point range and closing up 5.5 points. The CBOE Volatility Index (.VIX) hit a morning low of 27.96 and afternoon high of 31.15, before settling down .47 to 29.65. Two of the biggest trades in the index market were in the SPX July 1000 – 925 put spread, which traded 17,500X. With the index near 1,028, it appears that an investor bought the 1000s for $10.50 and sold the 925s for $1.50, creating a bearish trade with a breakeven (excluding commissions) if SPX falls to 991 by the July expiration.

ETF Trading
IShares Silver Fund (SLV) options were busy. Shares finished down 6 cents to $17.40 and 95,000 contracts traded on the fund, including 40,000 calls and 54,000 puts. As noted in the midday report, buyers of August 15 puts were busy in morning trading. The biggest trades of the day surfaced in the January 2012 puts later, however, after a strategist bought 10000 $13 puts at $1.11 and sold 10,000 $20 calls at $2.51, creating a “bearish risk reversal” at a $1.40 credit. It was tied to a block of SLV shares and part of a “collar” trade, according to a source on the exchange floor.