Expiration Friday 11-19-2010

Cusick's Corner
Options expiration often drives trading volume on the exchanges, but not today. Volatility has also cooled off, the VIX is down over 3%. All eyes have been on Ireland this week -- its four year debt reduction plan is expected to be unveiled next week. There has been a lot of European pressure for Ireland to increase its corporate tax rate which is currently 12.5%. In the Financial Times today, there was a quip mentioned that was circulating around the banking community in 2008, “What's the difference between Iceland and Ireland? One letter and six months.” Next week will be a shortened trading week, but on Tuesday afternoon the Fed will release the minutes from the latest FOMC meeting which kicked off this latest round of QE. Have a great weekend.

With no economic data or earnings of importance to guide the trading, the focus early Friday was on the options expiration and news from overseas. The tone of morning action was cautious on news Chinese monetary officials told their banks to curb lending; a move designed to slow lending and to prevent asset bubbles. The concern is that tighter policy in China will also slow economic growth in Asia's largest economy. However, hopes that EU, IMF and Irish officials are reaching agreement on a bailout of Ireland seemed to help ease some of the recent worry about the European Debt Crisis. The euro edged higher and recovered some of its recent losses. Meanwhile, in the US, stocks moved broadly lower at the open, but the selling never gathered any momentum.

Bullish Flow
A number of managed care names saw increasing options action Friday. Aetna (AET) was one of them. Shares of the healthcare insurance provider added 32 cents to $30.47 and options volume hit 4.5X the average daily, with 27,000 calls and 5,620 puts traded in the name. December 32 calls, which traded 15,200X, were the most actives. December 30 and 31 calls were very busy as well. There was no company specific news on the ticker and the bullish trading seems to be a sector play, as a number of other names in the space saw heavy call trading as well (see the below).

Bullish options action was also seen in WellPoint (WLP), Cigna (CI), and United Healthcare (UNH).

Bearish Flow
Dow component Hewlett Packard (HPQ) is seeing heavy trading ahead of its earnings, due out Monday after the closing bell. Shares of the computer maker are up 79 cents to $42.48. Meanwhile, options volume includes 47,000 calls and 28,000 puts, or more than double the typical activity. The top trades surfaced in morning action after one strategist sold 5,300 December 45 calls at 57 cents each to buy 5,300 December 39 puts at 57 cents. This bearish “risk-reversal” might be a hedge or a “collar” designed to protect the stock from the risk of post-earnings sell-off.

Bearish flow also picked up in Cisco Systems (CSCO), Clearwire (CLWR), and Deutsche Bank (DB).

Index Trading
Call volume is picking up in the CBOE Volatility Index (.VIX), even as it falls .76 to 17.99. It's been a quiet day of trading Friday, with the S&P 500 up just 1.2 points in late-afternoon action. However, some investors seem to be bracing for potential volatility down the road. More than 400,000 calls and 94,000 puts traded on the volatility index so far. The top trade was part of a spread, in which the investor apparently bought 18,000 December 30 calls at 69 cents and sold 36,000 December 37.5 calls at 27 cents. This 1X2 call ratio spread, for a net debit of 15 cents, looks like a bullish play on the VIX in anticipation of a move higher in VIX between now and December.

ETF Trading
IShares Hong Kong Fund (EWH) sees increasing put activity Friday. Shares are down 36 cents to $19.19 after Chinese officials ordered their banks to slow lending activity. The move is designed to slow inflation and prevent asset bubbles. Some market watchers rate hikes to follow and, if so, slow economic growth in China. For that reason, perhaps, some investors are trading January 18 puts on the iShares Hong Kong Fund. Morning trades included blocks of 5000 contracts at 45 and 50 cents. More than 13,000 now traded, as some investors appear to be buying premium, taking new positions, and bracing for a decline in EWH shares from now through mid-January 2011.