Three Strategies for Bullish & Low IV Sentiment 11-23-2010

Cusick's Corner
As I said yesterday, I want to breakdown some strategies that are worth looking at when you have a grasp of trend and volatility sentiment. Let's look at this example -- you are bullish (trend up) and feel that implied volatility is low. Strategically there are three strategies that vary in degree of complexity: 1) Long Call - typically at- or slightly in-the-money (make sure that you are using stops). 2) Bull call spreads - the call bought is at-the-money and the call sold is out-of-the-money. 3) Buy out-of–the-money call calendar spreads - sell a call that is the same strike price as the call that is bought further out with both calls out-of-the-money. These spread strategies mitigate the premium risk of the option purchased, but the trade off is that the short option limits profit as well. Bull call spreads might be more effective in an environment where the swings are consolidated (like SPY trading between 118-120) and you have a target to the short strike. We have a great Webinar that discusses these trades, click the Link http://www.optionsxpress.com/free_education/on_demand_videos.aspx. See you After Hours where we will discuss bearish, low implied volatility strategies.

Stocks are broadly lower on worries about escalating tensions in Korea and following a steep slide in the euro Tuesday. The table was set for early losses on Wall Street after Asia's equity markets slid on concern about military conflict between North and South Korea. The two countries exchanged artillery fire, killing two South Korean marines. Meanwhile, uncertainty about the European Debt Crisis continues to weigh on markets across the Euro-zone and the euro. The European currency is down to 1.333 against the buck, from 1.357 late-Monday. The volatility across Asia and Europe spilled over onto US shores and overshadowed a better-than-expected reading on third quarter GDP (2.5 percent vs. 2.4 percent consensus). The Dow Jones Industrial Average is down 150 points and the NASDAQ lost 44 through midday. The CBOE Volatility Index (.VIX) is up 2.63 to 21.00. Options volume is respectable, with 4.1 million calls and 3.6 million puts traded through 12:15 ET.

Bullish
Toll Brothers (TOL) lost 2 pennies to $17.76 and is showing some resilience after data released Tuesday morning showed Existing Home Sales falling to an annual rate of 4.43 million in October, which was down from September, but in-line with economist estimates. Meanwhile, options volume in Toll Brothers is running 10X the usual, with about 16,000 calls and 3,250 puts traded on the homebuilder. December 18 calls are the most actives. 12,800 traded and, with 65 percent trading at the ask, it looks like call buyers are dominating the action. It might be a play on Toll Brothers' earnings, due out on December 2.

Collective Brands (PSS) is seeing relative strength. Shares are up 60 cents to $17.37 through midday. Meanwhile, options volume is running 2.5X the average daily. 2,800 calls and 17 puts traded in the name. The focus is on the December 20, January 20, and January 21 calls. It's noteworthy because PSS saw bullish order flow Monday and is due to release earnings on December 1. No other news on the ticker to explain the bullish trading this week.

Bearish
Home improvement retailer Lowe's (LOW) is trading down 23 cents to $22.09 and options volume is 2.5X the average daily, led by a January 20 – 22.5 risk-reversal that traded at 42 cents, 14000X in morning action. The strategist sold 14,000 January 22.5 calls at 72 cents to buy 14,000 January 20 puts at 30 cents, according to a source on the PHLX exchange floor. This bearish risk-reversal might be a closing trade (open interest is sufficient to cover in both contracts), or it might also be a “collar” to hedge a position in Lowe's shares.

Banco Santander (STD), a Spanish bank, is down 63 cents to $10.55 on concerns debt problems in Europe are spreading to other countries like Portugal, Italy and Spain. Greece and Ireland have are already being bailed out. Meanwhile, options order flow in STD is bearish Tuesday. Total volume is running 2.5X the average daily, with 5,900 puts and 1,140 calls trade don the bank so far. December 10, December 12.5 and January 10 puts are the most actives.

Unusual Volume Movers
HP (HPQ) options volume is running 3X the usual, with 145,000 contracts traded and call volume accounting for 74 percent of the activity, according to data from website WhatsTrading.com.

Electronic Arts (ERTS) options activity is running 12X the usual, with 121,000 contracts traded and call volume representing 99 percent of the volume.

Dynegy (DYN) options volume is 7.5X the typical levels, with 101,000 contracts traded and call volume accounting for 84 percent of the activity.

Increasing volume is also being seen in Lowe's (LOW), Walgreens (WAG), and J Crew (JCG).

Implied Volatility Movers
CBOE Volatility Index (.VIX) is rallying amid increasing levels of global equity market volatility Tuesday. Markets across Asia and Europe suffered steep losses before the exchanges opened in the US. The S&P 500 (SPX) then opened sharply lower and is down 15.41 to 1182.43. Trading in SPX options reflects the cautious underlying tone, with 186,000 puts and 86,000 calls traded on the index so far. Meanwhile, VIX, which tracks the expected volatility priced into S&P 500 options, hit a high of 21.45 and is up 2.27 to $20.64 midday Tuesday.