Risk On Trade 11-18-2010

Cusick's Corner
The market held its gains, the Dollar pulled back and commodities bounced off critical mid-term support. The risk on trade, equities, is still in play with the focus now off of EU and China (at least until tomorrow). Speaking of tomorrow, it is Expiration Friday, so there could be volatility.

Stocks finished broadly higher on economic data and hopes for a bailout of Ireland. Major averages were higher across Europe on optimism that EU, IMF and Irish leaders will agree about loans to help Ireland avoid default on its debt. Britain, one of the largest holders of Irish debt, also pledged aid yesterday. Meanwhile, the domestic news included a report that showed weekly jobless claims up just 2,000 in the period ended 11/13. Economists were looking for an increase of 5,000. Separate data released later showed the Philadelphia Fed Manufacturing Survey jumping to 22.5 in November, from only 1.0 in October and much better than the 5.0 that economists had expected. The Dow Jones Industrial Average powered higher in morning trading on the data and events across the Atlantic. From there, the Dow churned around sideways through the most of the session. At the closing bell, the industrial average was up 173 points. The NASDAQ added 38. Trading was active heading into the expiration, with about 9.7 million calls and 7.1 million puts traded on the session.

Bullish Flow
An interesting call spread traded in CommScope (CTV) Thursday. Shares finished up 6 cents to $31.99 and have added 38.4 percent since Carlyle Group made a bid for the company on October 25. Meanwhile, in options action Thursday, one investor initiated a November 31 – December 32 call spread for a net credit of 35 cents, 10000X. They sold 10000 November 31 calls at $1, possibly exiting a position opened two days after the deal was announced, to buy 10000 December 32 calls at 65 cents. They might have a bullish view on the stock and are closing out the November calls ahead of the expiration, but also buying an additional month of premium.

Bullish options action was also seen in O'Reilly Automotive (ORLY), Allied Irish Banks (AIB), and Heinz (HNZ).

Bearish Flow
Region's Financial (RF) has been under pressure in recent days. Shares touched a new 52-week low and finished the day down 23 cents to $5.31. RF is off 13.7 percent over the past three days after the company announced the departure of three risk managers Tuesday. Meanwhile, options trading has been brisk. 55,000 puts and 15,000 calls traded on the bank yesterday. 68,000 puts and 18,000 calls traded in the name today. December 4 and 5 puts were the most actives, as some players seemed to be buying premium on concerns about additional losses in the weeks ahead.

Bearish flow also picked up in Sempra Energy (SE), Stanley Black and Decker (SWK), and Kohl's (KSS).

Index Trading
Volume was up, but volatility fell in the index market ahead of the expiration. Since many of the cash indexes settle based on Friday morning prices, the last day to trade the contracts is on the Thursday before the expiration. For that reason, volume also picks up on the Thursday before expiration Saturday. Today, for example, 785,000 calls and 790,000 puts traded on the S&P 500 Index (.SPX) and other cash indexes. SPX November 1200 puts were the most actives. 101,000 changed hands. The S&P 500 added 18.10 to 1,196.69 and very near the 1,200 strike. So, some investors were likely closing positions rather than face exercise or assignment on those puts. Meanwhile, CBOE Volatility Index (.VIX) fell 3.01 to 18.75 as stocks rallied and levels of fear fell Thursday.

ETF Trading
IShares Japan Fund (EWJ) finished the day up 26 cents to $10.48 and options volume rose to 2.5X the recent average daily levels. 31,000 calls and 585 puts traded on the exchange-traded fund, according to Trade Alert data. One player sold 10,000 March $10 calls at 73 cents per contract in morning trading. An hour later, a block of 10,000 January 2012 $12 calls were bought at 34 cents per contract. The same investor might have initiated both trades – selling March 10 calls to close a position while opening a new bullish position in the 2012s.