Balancing QE 11-03-2010

Cusick's Corner
The election results are in and the market has pulled back slightly in front of the FOMC announcement. This goes back to the discussion that many events, like the election, are already priced into the market. Now with the infusion of cash from the Fed in the forefront, the market faces a double edged sword. If the Fed does too much QE, we throw the first shot in the currency battle which stresses the creditors. If not enough QE is tossed into the system, we threaten the risk of further defaults on the homes front, further freezing credit and potentially putting us into a double dip. These are just some of the heavy issues and volatility looks to be potentially on the horizon. Let's wait and see what the Fed will do in their secondary market purchases. See you After Hours.

Major averages are modestly lower in cautious trading ahead of the Federal Reserve's interest rate announcement. With no major surprises in the results from the mid-term elections, stocks opened mixed and then attention quickly turned to the Fed's meeting today. The post-meeting statement is due at 2:15 ET and while officials are not expected to announce any changes in rates, the question is regarding the size of Treasury bond purchase plans. According to recent media reports, investors expect the Fed to announce the purchase of $500 billion or less. The tone of trading is cautious and the market has fallen into wait-and-see mode ahead of the news. The Dow Jones Industrial Average is down 20 points and the NASDAQ lost 10. The CBOE Volatility Index (.VIX) has added .39 to 21.96. Options volume is running about typical levels. 3.8 million calls and 3.2million puts traded by 12:30 ET.

Bullish
Ford Motor (F) saw an interesting spread trade ahead of October auto and truck sales results. The numbers are expected Wednesday afternoon. Shares are up 30 cents to $14.73 ahead of the news and touched a new 52-week high today. Meanwhile, one investor initiated a January 12.5 – March 15 call spread at $1.26, 20000X. That is, they bought 20,000 March 15 calls at $1.18 and sold 20,000 January 12.5 calls at $2.44. This looks like a position adjustment or a roll, where the investor sold a large position in in-the-money calls to open a similar bullish position in out-of-the-money calls.

MGM is seeing a day of heavy trading, as investors reacted positively to the casino operator's earnings report. Shares added 85 cents to $12 after MGM posted a 21-cent per share quarterly loss, which three cents better than expected. The company reported its best quarter ever in the Macau region. Shares are up on the news and options volume is double the recent average daily. 119,000 calls and 26,000 puts traded in MGM so far. The action included large buyers of December 14 calls at 24 cents in morning trading. 43,400 contracts now trade.

Bearish
The biggest options trade so far today is in the SPYders (SPY). The exchange-traded fund, which holds the S&P 500 stocks, is down 20 cents to $119.27 ahead of the Federal Reserve's post-meeting policy statement. In options action, one investor apparently sold 50,000 of the Weekly 118 puts (that expire on November 5) at 71 cents and bought 50,000 November 118 puts that expire in two and half weeks. This “calendar spread” might be a bet that shares will hold above $118 through the end of this week and then fall from that point forward.

LSI puts are seeing interest. Shares of the chipmaker are down 8 cents to $5.27 and options volume is 6X the average daily. About 23,000 puts and 3,740 calls traded in the name so far. January 2012 puts at the 5 strike are the most actives. 14,200 traded. Another 7,700 January 5 puts changed hands. No news on the ticker today. Some investors might be buying puts to protect recent gains. LSI is up 12.6 percent since October 26.

Unusual Volume Movers
MGM options volume is running 2X the usual, with 137,000 contracts traded and call volume accounting for 82 percent of the activity, according to data from website WhatsTrading.com.

AIG options activity is running 2.5X the usual, with 51,000 contracts traded and call volume representing 82 percent of the volume.

Wellpoint (WLP) options volume is 2.5X the typical levels, with 47,000 contracts traded and call volume accounting for 68 percent of the activity.

Increasing volume is also being seen in Symantec (SYMC), EOG, and Dish Networks (DISH).

Implied Volatility Movers
Symantec (SYMC) implied volatility is rallying amid heavy trading in SYMC call options Wednesday. Shares lost 29 cents to $16.40 and options volume is 3X the average daily. 32,000 calls and 9,600 puts traded on the security software maker through midday. It's unusual because there is no news on the stock and implied volatility has risen about 26 percent to 40.