Market Range-Bound 11-30-2010

Cusick's Corner
Even though the market has been in a range, it's been full of intraday volatility. One way to participate in this kind of volatility in a mitigating fashion is to use spreads. Take a look at the JC Penny bear put spread that traded under the Bearish section -- this strategist is implementing a bearish sentiment in front of the same stores data out 12-2. When I look at the implied volatility, which is low, buying the at-the-money strike makes sense. But if the stock does not move in the right direction (down in this JCP strategy), then the strategist wants to mitigate that decay risk in the long option by selling the out-of-the-money put, reducing the premium risk in the option that was bought by over 29%. The trade off is that they give up downside profits if the stock goes below $30. So with a bearish sentiment and interpretation of low implied volatility (check out our Volatility View), the ATM bear put spread is a potential strategy to consider. See you After Hours.

Stock market averages fell Tuesday despite a round of positive economic news. Data released at 9:45am ET showed the Chicago PMI, a gauge of regional manufacturing activity, to 62.5 in November; which was up from 60.6 in October and significantly better than the 59.6 reading that economists had expected. Separate data released 15 minutes later showed the Conference Board's Consumer Sentiment Index up to 54.1 in November, from 49.9 last month and better than the 52.0 that economists had predicted. Yet, with the euro still reeling and European equity markets suffering another round of losses, the tone of trading remains cautious on Wall Street as well. The Dow Jones Industrial Average is down 40 points through midday. The tech-heavy NASDAQ lost 25.5 after Google (GOOG) shares fell on news of an EU investigation into complaints against the Internet giant. The CBOE Volatility Index (.VIX) is up 1.31 to 22.84. Overall options volume is light and seems a bit more defensive than usual, with about 3.4 million calls and 3.4 million puts traded through 12:30 ET.

Bullish
UPS sees brisk trading. The action comes the day after FedEx (FDX) shares rallied on an analyst upgrade. FDX gained 4.7 percent Monday after Credit Suisse raised the stock to Outperform. Today, UPS is in focus. Although shares are flat at $69.88, 23,000 call options have traded on the shipping company. The volume represents more than 5X the norm and compares to put volume of 4,100 contracts. December 72.5 calls are the most actives. 11,850 changed hands so far. Dec 70, Jan 75 and July 67.5 calls are seeing brisk trading as well.

Ann Taylor (ANN) is running to a new 52-week high and was recently up $1.03 to $26.85. Meanwhile, options volume is 2.5X the average daily after 9,200 calls and 333 puts traded on the retailer. December 25 and January 28 calls are the most actives, with 2,300 and 5,550 traded, respectively. No news to explain the bullish flow. It might be a play on November same store sales numbers. Many retailers will release their results Thursday.

Bearish
Collective Brands (PSS) is seeing heavy trading ahead its earnings. Shares are off 50 cents to $16.77 and in the midst of a three-day 6.5 percent skid. Meanwhile, 21,000 puts and 2,400 calls have traded on the retailer through midday. The action is happening across a number of expiration months and strike prices. December 16, January 15, and March 17.5 puts are among the most actives. Implied volatility is up about 12 percent to 64, as some players seem to be bracing for a volatile move in PSS when the company reports Wednesday after the closing bell.

JC Penney (JCP) adds 55 cents to $33.32 and a noteworthy trade in the retailer today is a December 30 – 33 put spread. One strategist apparently paid $1.20 for the spread, 2000X. That is, they bought 2,000 December 33 puts at $1.71 and sold 2,000 December 30 puts at 51 cents each. It might be a play on November same store sales numbers, due December 2.

Unusual Volume Movers
Basic Materials Select Sector Fund (XLB) options volume is running 3.5X the usual, with 70,000 contracts traded and put volume accounting for 62 percent of the activity, according to data from website WhatsTrading.com.

UPS options activity is running 2X the usual, with 28,000 contracts traded and call volume representing 85 percent of the volume.

Alcatel Lucent (ALU) options volume is 9X the typical levels, with 18,000 contracts traded and call volume accounting for 83 percent of the activity.

Increasing volume is also being seen in Urban Outfitters (URBN), Supervalu (SVU), and FedEx (FDX).

Implied Volatility Movers
The CBOE Volatility Index (.VIX), which tracks the implied volatility of S&P 500 Index (.SPX) options, hit a high of 23.55 and is up 1.20 to 22.73 midday Tuesday. VIX has added 1.53 for the month of November. Meanwhile, one strategist seems to be looking for additional volatility through January and recently initiated a January 27.5 – 35 (1X2) call ratio spread at a dime (credit), 10000X. They sold 10,000 27.5s at $2.20 to buy 20,000 Jan 35s at $1.05. While they keep the 10-cent credit (X10000X100) if VIX settles below 27.5 at the expiration, they make better money if VIX sees a substantial rally between now and then.