Summertime Markets 07-26-2010

Cusick’s Corner
The market is holding key levels of 111 in the SPY. However, we cannot forget that this current trend is happening in July & August, months that have been notoriously slow and have never really been months that signaled a major trend change. At this stage these are trading markets, no matter if you are on the long or short side; these are not markets where long-term positioning is taking place. I only write this so there is no possible confusion of the state of the market -- it is a trader’s market, so act accordingly. One of the best ways to do that is to spread trade, whether you are bullish or bearish, thus mitigating short-term risks like volatility and time decay while implementing your opinion. (We have some great classes this week on this subject on the oX site.) See you Midday.

Stocks finished broadly higher with help from stronger-than-expected housing numbers Monday. FedEx (FDX) helped set the table for morning gains after the company said that it expects first quarter earnings of $1.05 to $1.25 per share, and better than the $1.01 that analysts had expected. The stock market’s early advance was extended 30 minutes into trading after a report showed New Home Sales improving to annualized rate of 330,000 in June, up from 267,000 the month before and better than the 310,000 that economists had expected. The Dow Jones Industrial Average was modestly higher midday and into the afternoon session. Then, a late day lift helped send the Dow to session highs and up 100 points on the day. At the closing bell, the industrial average was 111 points from its worse levels and just 2 points off session highs.

Bullish Flow
Dollar Thrifty (DTG) shares added 30 cents to $47.87 Monday and options activity picked up, with 11,000 calls and 3,160 puts traded in the name. One player apparently bought 3,276 September 50 calls at $1.30 per contract late in the session. Another trade involved 2,500 August 50 calls and 2,500 August 45 puts, which was apparently a bullish “risk-reversal” for a dime (buying calls at 65 cents and selling puts at 55 cents). The bullish trading comes the week after CNBC reported that Avis is likely to make a higher bid for DTG. Hertz (HTZ) has already made an offer for the rental car company and some investors might be taking bullish positions in DTG in hopes a bidding war between HTZ and Avis will lift the share price of Dollar Thrifty.

Bullish order flow was also seen in TEVA, Office Depot (ODP), and Activision Blizzard (ATVI).

Bearish Flow
Advanced Micro (ADM) added 25 cents to $8.07 and a noteworthy spread traded in the fund late Monday. About five minutes before the closing bell, 10,000 September 8 puts traded at the 52-cent ask price and 10,000 September 7 puts traded on the 19-cent bid. The action looks like a put spread buyer, opening a position at a 33-cent net debit. It might be a short-term hedge, as it offers a max pay-off of 67 cents (excluding commissions), if shares fall to $7 or less by the September options expiration. No news on the chipmaker Monday. The company reported earnings two weeks ago.

Bearish flow also picked up in Schlumberger (SLB), Symantec (SYMC), and Urban Outfitters (URBN).

Index Trading
All was calm in the index pits Monday, as 332,000 calls and 434,000 puts traded on the S&P 500 Index (.SPX) and other cash indexes. The volume represents only 75 percent the recent average daily. Many players are away on vacation in the second half of July and that might help explain the low volume. Also, volatility is low. The S&P 500 traded in a 14-point range and finished up 12.4 points Monday. The 20-day statistical volatility of the S&P 500, which measures past volatility, is now 23.6 percent. Meanwhile, the CBOE Volatility Index (.VIX), which measures expected volatility (based on SPX options), lost .74 to 22.73. Therefore, VIX is just slightly below the actual volatility over the past 20 days, indicating that players in the options market believe volatility will continue to ease from current levels.

ETF Trading
Judging by the action in the iShares Russell 2000 Small Cap Fund (IWM) options Monday, not everyone expects volatility to ease in the future. Afternoon trades included a buyer of 20,000 January 65 – 60 put spreads on the fund for $1.76 each. Another investor bought 7,000 September 60 – 65 put spreads at $1.39. The most noteworthy trade of the day was a buyer of 53,000 September (Quarterly) 65 puts at $2.95. They also sold 93,000 September (Quarterly) 60 at $1.55. With IWM up $1.48 to $66.46, this massive ratio is a bearish bet or a hedge, as it makes its best profits if the fund falls to $60 (or 9.7 percent) by the end of the third quarter.