Market Holding in a Tight Range 08-02-2010

Cusick’s Corner
The market was content staying in a grind, holding a tight range of 1082-1086. All the fireworks will be blown off tomorrow premarket when the Payrolls and Unemployment numbers are released which may potentially add some volatility. If there are no big surprises in Unemployment, if over 10%, Non-Farm, below -130K and Hourly Earnings, potentially going negative, the market may just dry up in front of the last long weekend of the summer. Trading desks may start to clear out early tomorrow if this data is a non-event, so make sure that if you need to make some adjustments that you plan accordingly. See you Midday.

The major averages held modest gains on a relatively slow day of trading Thursday. The focus early was on data released pre-market that showed weekly jobless claims falling by 6,000 to 472,000 in the last week of August. Economists were looking for a decline of 3,000. A separate report showed second quarter productivity revised down to a 1.8 percent rate, which was in-line with economist estimates. Later, during market hours, data showed Factory Orders up .1 percent in July and less than the .3 percent increase that economists had expected. The bright spot, however, was the latest Pending Homes Sales report, which showed an increase of 5.2 percent in July; up from –2.8 percent in June and significantly better than what economists had expected (0 percent). The major averages saw a modest lift on the data and not much has happened since that time. The Dow Jones Industrial Average traded in a 66-point range and closed up 50 points. The NASDAQ added 23.

Bullish Flow
Anadarko Pete (APC) saw heavy trading after The Australian published a story saying BHP might have APC on its radar as a possible acquisition target. APC gained $1.45 to close $50.24 and options volume hit 3X the daily average. About 50,000 calls and 15,000 puts. The September 55 calls are the most actives. 9,458 traded and the action seems to include a mix of buying and selling, as 34 percent traded on the bid and 54 percent at the ask (the rest mid-market). The contract is 9.7 percent out-of-the-money with 15 days left until expiration. Since Monday is a holiday, there are only 10 trading days left before September options expire. Some players might be selling the contract on the view that, even after today’s news, a move to $55 is unlikely. Others might be buying the contract on hopes for some sort of an announcement.

Bullish flow was also detected in Gannett (GCI), Burger King (BKC), and Goodyear Tire (GT).

Bearish Flow
Apache (APA) slid to a low of $87.58 on news of an explosion on a Mariner Energy (ME) rig in the Gulf of Mexico. Apache is in the process of acquiring Mariner Energy and therefore the stock saw a volatile reaction to the headline. However, according to recent news reports, there were no fatalities and no oil leakage caused by the explosion. Apache shares have recouped some of their losses and closed down $1.16 to $91.30. Nevertheless, options action remained brisk and somewhat defensive, with 31,000 puts traded on APA so far, which is 10X the usual and double the number of call options traded in the name.

Bearish flow also picked up in Mariner Energy (ME), Helix Energy (HLX), and Taubman Centers (TCO).

Index Trading
The top two options trades so far Thursday are in the CBOE Volatility Index (.VIX). VIX closed down .71 to 23.18 and the trades involved a spread, in which an investor apparently sold-to-close a position in 43,800 September 25 puts at $1.34 and bought-to-open a position in 43,690 October 25 puts at $1.14. After a two-day 3.76-point slide in the VIX, this strategist might be rolling bearish position from one month to the next. Note that the October options are cheaper than September because VIX options are based of futures and the market is implying higher volatility in the future. Hence, puts are cheaper in October relative to September.

ETF Trading
A large diagonal spread traded in the iShares MSCI EAFA Fund (EFA) Thursday. EFA is an exchange-traded fund that holds shares from foreign companies domiciled in Europe, Asia and the Far East. Shares closed up 29 cents to $52.01 and one strategist apparently sold more than 20,000 September 54 calls to buy the same number of October 55 calls. They paid a 29-cent net debit for this diagonal spread and are probably looking for the fund to hold below $54 through the September expiration (15 days) and then rally from that point forward.