Identify Risk Exposure & Consider Puts 08-20-2010

Cusick’s Corner
The market wrapped up August Expiration flat with all major indices in spitting distance of breakeven. The tea leaves on the markets are not rosy, but this is when, even with all the indicators screaming at you, you need to stay on your toes for the unexpected. Take the weekend and review some points: First, check the diversity of your positioning. Second, identify where you have the most exposure and see if some insurance, possibly puts, are worth potentially investing in as we move into September and October. Lastly, keep an eye on the M&A chatter which has been a catalyst in Tech.

The major averages battled back from early losses and finished mixed Friday. Hewlett Packard (HPQ) lost 2.2 percent and was the biggest loser in the Dow Jones Industrial Average after the computer maker posted lackluster earnings late Thursday. Exxon Mobile (XOM) and Chevron (CVX) also weighed on the Dow after crude oil lost 98 cents to $73.45. Volatility in the currency markets attracted some attention, as the euro fell to 1.273 from 1.283 after the European Central Bank said it would keep monetary policy loose through the rest of this year. Finally, the options expiration might have exacerbated volatility a bit as well. Trading was active and cautious, with about 7.75 million puts and 7.2 million calls on the tape. Meanwhile, the Dow Jones Industrial Average, which traded down as much as 125 points early, finished off 57. The NASDAQ finished .8 points higher.

Bullish Flow
Petrohawk (HK), a Houston, TX oil and gas company, saw unusual volume. Shares have been reeling lately, down 52 cents to $15.34 Friday and off 29.4 percent over the past two months. In the options market, volume surged as 18,000 calls and 1,980 puts traded in the name. The focus was predominantly on the September calls. The Sep 16s saw the most action with 5,572 contracts traded and 64 percent traded at ask. Sep 17.5 and 19 calls saw similar activity and it looks like call buyers were driving the action, probably hoping the stock can bounce in the weeks ahead.

Bullish flow was also detected in Fibria Cellulose (FBR), Linear Tech (LLTC), and Activision Blizzard (ATVI).

Bearish Flow
Massive blocks of puts traded in Wells Fargo (WFC) Friday. Shares of the bank finished up 17 cents to $24.60 and one investor sold 55,000 January 30 puts at $6.15 to buy 55,000 January 22.5 puts at $1.83 and 55,000 January 20 puts at $1.12. This spread is likely a closing position, or an investor selling the 30s and buying 20s and 22.5s to close a position opened several months ago. If so, it’s not really a bearish play. Instead, this strategist is banking a profit after a four-month 27 percent slide in the stock price – betting perhaps that he worst is over for Wells Fargo.

Bearish flow also picked up in FMC Technologies (FTI), Best Buy (BBY), and Dollar Thrifty (DTG).

Index Trading
The CBOE Volatility Index (.VIX) hit a high of 27 Friday morning, but finished down .95 to 25.49 on the session. The decline in the VIX happened even as the S&P 500 lost 4 points on the day. The weakness in the volatility index might reflect expectations of low volatility during the final two weeks of August and heading into the Labor Day weekend the first week of September. Meanwhile, a noteworthy spread on the VIX surfaced late Friday when a strategist apparently bought 10,000 October 30 puts at $2.80 and sold 10,000 October 25 puts at 80 cents. This spread, at a $2 net debit, is bearish on the VIX. It yields a possible $3 pay-off (excluding commissions) if VIX settles below $25 at the October expiration.

ETF Trading
Trading was brisk in the exchange-traded funds Friday, with 3.3 million puts and 2.2 million calls traded across all products. Players were busy closing and rolling positions ahead of the August expiration. August 107 and 108 puts and calls on the SPYders (SPY) were among the top five most actives. The top trade of the day was actually in the SPDR Gold Fund (GLD), however. Shares finished down 42 cents to $119.97 and one investor initiated a bearish 1x2 put ratio spread by selling 21,000 Sep 114 puts and buying half as many (10,500) of the Sep 117 puts. This spread is bearish and makes its best profits if the fund, which owns gold, falls to $114 by the September expiration, which is now four weeks away.