30-Yr Bond Yields Leading Move in Dollar 11-17-2010

Cusick's Corner
The market continued its grind into the After Hours with neither side catching any momentum. I have been keeping an eye on the Euro -- as the Euro goes, so goes the market. If the Euro firms up and runs, expectations would be that the market would follow. 30yr Bond yields have also been leading the move in the Dollar as of late, so any weakness in the Buck could be signaling that the 30yr yields are starting to back off. If these EU concerns escalate (should know more overnight because the Irish are meeting with the ECB), there could be a flight for Bonds and the Buck may come under pressure, but that does not look to be the case at this juncture. One final note -- VIX, volatility is on the move and if that trend continues, could be in for some potentially violent action in the short-term. See you Midday.

Major averages finished mixed on a relatively quiet day of trading Wednesday. After Tuesday's 178-point nosedive, the Dow Jones Industrial Average opened steady following a round of mixed economic news. A report released before the bell showed Consumer Prices [CPI], a gauge of inflation at the consumer level, up .2 percent in October. Economists were looking for an increase of .3 percent. However, the latest Housing Starts data wasn't very encouraging. It showed a drop of 69,000 to an annual rate of 519,000 in October, which was well below expectations of 600,000. The data didn't move the market much because domestic news continues to take a backseat to worries about rate hikes in China and uncertainty about a bailout of Ireland by the EU and IMF. On Wednesday, Britain, which is not a member of the EU block, offered to lend Ireland some aid. The news might have temporarily eased market jitters a bit. Yet, the underlying tone of trading remains cautious as events overseas unfold. The Dow Jones Industrial Average traded in a narrow 52-point range and lost 16 points on the session. The NASDAQ added 6.

Bullish Flow
NetApp (NTAP) added a bit of excitement to an otherwise quiet trading session. Shares traded down $3.44 to $49.25 in volatile afternoon action after the company's earnings report was released early. NetApp was due to release its results after the closing bell. Shares sank on the news before being halted. The stock has now resumed trading in the after hours and has recaptured the $50 level. Meanwhile, options action was brisk in afternoon action as the numbers were analyzed. 49,000 calls and 36,000 puts traded in NetApp. November 55 calls were the most actives. 21,100 traded. While some players were seen buying the contract early in the session, others scrambled to sell the contract as shares sank on the pre-mature earnings release Wednesday afternoon.

Bullish options action was also seen in SINA, Delta (DAL), and Forest Labs (FRX).

Bearish Flow
A massive combination trade surfaced in retailer Kohl's (KSS) Wednesday. Shares added $2.15 to $52.80 and one strategist initiated a December 50 put – 57.5 call “risk-reversal” at 55 cents, 50,000X on the PHLX. According to an exchange-floor contact, it looks like the strategist bought the 50,000 puts and sold 50,000 calls to open a new bearish position in KSS. It wasn't a straight bearish play, however. The risk-reversal was also tied to a block of 2.15 million Kohl's shares at $52.12. They bought the stock and put a “collar” around it.

Bearish flow also picked up in Netapp (NTAP), Banco Santander (STD), and Mylan (MYL).

Index Trading
Trading in the index market is clearly picking up, as the underlying tone of trading has become a lot more cautious and defensive in recent days. 931,000 puts and 657,000 calls traded across the S&P 500 Index (.SPX) and other cash indexes. The top index options trades for the day were in the CBOE Volatility Index (.VIX), which lost .82 to 21.76. In this trade, the strategist apparently bought 19,900 December 30 calls at 74 cents each and sold 39,800 December 37.5 calls at 32 cents. In other words, the 1X2 call ratio spread for a net debit of 10 cents. A fund manager or other institutional investor looking to hedge the risk of increasing volatility probably initiated the trade.

ETF Trading
An impressive butterfly spread traded in the iShares Small Cap ETF (IWM) late-Wednesday. Shares of the exchange-traded fund added 19 cents to $70.83 and one player initiated a massive put fly in the December quarterlys. In this spread, they sold 40000 December 62 puts at 57 cents for the body. They bought 20000 December 66 puts at $1.20 and also bought 20000 December 51 puts at 7 cents. The 51s and 66s are the wings of the fly. The total net debit paid is 13 cents (excluding commissions). The best pay-off from this fly happens if shares fall to $66 (the body) or 6.8 percent, by the end of the fourth quarter. An institution looking to hedge a portfolio through yearend probably initiated the bearish spread.