Bond Yields & Market Correlation Intact 08-27-2010

Cusick’s Corner
As I noted yesterday in the Corner, that close looked like a nice short squeeze while today’s equity move to the upside comes on some earnings warnings and continued concerns about the pace of economic growth. The volume for the longs has been unusually strong at this point and there looks to be some potential follow through to the upside. Also, the correlation between bond yields and the market is well intact, with the bond ETF TLT (Risk off trade) pulling back with the Risk on trade (Equities). The market may need to pullback some if we are going to see potentially new highs this After Hours. See you then.

Economic news, a warning from Intel (INTC), and comments from Federal Reserve Chairman Bernanke triggered an uptick in volatility Friday morning. Stock index futures were higher ahead of the opening bell after data showed Gross Domestic Product [GDP] increasing by an annual rate of 1.6 percent in the second quarter; which was down from 2.4 percent in the first, but better than the 1.4 percent that economists had predicted. However, the major averages fell deep in the red in morning trading after Intel slashed its third quarter revenue outlook. But, the sell-off was short-lived, as Intel saw a v-shaped recovery off fresh 52-week lows and moved back to positive territory. Reassuring words from Bernanke seemed to help as well. The head of the Fed said the Federal Reserve stands ready to buy mass amounts of securities should the economy deteriorate further. Stocks rallied around the news. The Dow Jones Industrial Average is up 125 points. The NASDAQ added 24. The CBOE Volatility Index (.VIX) lost 1.81 to 25.56 and trading is active, with about 3.6 million calls and 3.2 million puts traded through 12:15 ET.

Bullish
The top options trade so far today is in BofA (BAC). Shares of the financial services giant are up 14 cents to $12.61 and the top trade of the day is a buyer of 26,000 September 12 calls at 83 cents per contract. BAC has been under pressure during the month of August, down 11.6 percent. Shares are down 35.3 percent since mid-April. This call buyer might be anticipating a rebound in the weeks ahead and before the September options expire in three weeks. However, rather than taking a position in shares, they are buying September 12 calls, which assures the right to buy the stock at $12. Since they’re paying 83 cents, the breakeven at the September expiration is $12.83 or 1.75 percent above current levels (plus commissions). If the stock falls below $12, then the entire debit is at risk. In this case, 26000 X.83 X100.

Hecla Mining (HL) shares added 19 cents to $5.33 and options volume is running 6.5X the average daily, with 36,000 calls and 5,590 puts traded so far. The action is concentrated in the December 5 calls. 25,000 have traded through midday. Looks like call buyers are taking new positions, as most of the volume has traded either mid-market (between the bid and ask) or at the ask. The Idaho-based company mines for silver, gold and zinc. Today’s call buyers might be taking positions in anticipation of higher metals prices and subsequent gains in HL shares.

Bearish
Big Prints in International Game Technology (IGT) Friday after one investor sells the September 15 straddle at 90 cents, 12500X. That is, they sold 15,000 September 15 calls at 50 cents and sold 15,000 September 15 puts at 40 cents. Shares are up 5 cents to $15.12 and this short straddle is not necessarily a bearish play. Rather, it appears to be a bet that IGT will hold around $15 through the September expiration.

Put buyers are active in Itau Unibanco Holding (ITUB), a Sao Paulo-based money center bank. Shares added 57 cents to $20.86 and the top trade in the name is a lot of 532 December 17.5 puts, which is an opening buyer, according to sentiment data and in total 1,010 contracts traded. Another 1,500 December 19 puts changed hands. Looks like some investors are buying puts and bracing for potential volatility in ITUB between now and yearend.

Unusual Volume Movers
Aruba Networks (ARUB) options volume is running 3.5X the usual, with 16,000 contracts traded and put volume accounting for about 66 percent of the activity.

3Par (PAR) options activity is running 13X the usual, with 97,000 contracts traded and call volume representing 71 percent of the volume.
Omnivision Tech (OVTI) options volume is running 2X the usual, with 14,000 traded and put volume representing 55 percent of the activity.

Unusual volume is also being seen in ON Semiconductor (ONNN), Tiffany (TIF), and Altera (ALTR).

Implied Volatility Movers
The CBOE Volatility Index (.VIX) saw wild action Friday. VIX opened at 26.50 before rallying to 28.11 after a revenue warning from Intel sent the market skidding in morning action. However, the decline in Intel and the S&P 500 ended abruptly around 10:10am ET and since then the VIX has been falling. The volatility index is now down 1.74 to 25.63 and not far from session lows. On the week, VIX is little changed.