Watch Relationships 12-09-2010

Cusick's Corner
There are relationships that you watch -- bonds & equities, strength in offensive sectors, XLF, that help traders and investors position. While these relationships often change, faster than my wife's mind about whether she still likes me or not, they are important to watch. Bond yields were on the move in the long end of the curve, a plus for equities, and that new-found cash is now finding new homes. One benefactor is the Finance sector, XLF, one of the four offensive sectors that I monitor, especially Brokers, IAI. Strategically, it's long calls in a low volatility environment and bullish sentiment, but if you want to offset the premium of the call purchase, sell an out-of-the-money call and create a bull call spread. You mitigate the volatility and price risk of long premium. Watch the Trade Balance and Michigan Sentiment, these could move the markets.

Stocks finished mixed in slow trading Thursday. Economic news was in focus early after the Labor Department reported that jobless claims fell by 17,000 to 421,000 in the first week of December. Economists were looking for a smaller decline of 9,000. Separate data released later showed wholesale inventories up 1.9 percent in October, and 1.2 percent more than expected. At the end of the day, the economic data didn't seem to matter much, as the stock market averages traded in a narrow range throughout the session. Some investors are keeping an eye on the bond pits, where Treasurys were pummeled and yields ran higher Tuesday and Wednesday. Yet, trading was orderly Thursday and equity markets were stable in Europe as well. Consequently, there wasn't much volatility on Wall Street. The Dow Jones Industrial Average traded in an 80-point range and finished with a two-point loss. However, the tech-heavy NASDAQ added 7.5.

Bullish Flow
Citigroup (C) calls saw another day of heavy trading Thursday. The action started picking up Tuesday on news the government was selling its remaining stake in the bank. Citi shares gained 3.8 percent on the news Tuesday and have been able to build on the gains since that time. The stock finished up a nickel to $4.69 today. Meanwhile, options order flow included about 900,000 calls and 263,000 puts in Citi. The biggest trade of the day was a massive purchase of 204,391 January 2012 $5 calls at 60 cents each. This wasn't a straight call buyer, however. The position was tied to a block of 15.4 million shares at $4.69, according to a source on the exchange floor. Nevertheless, Citi shares are in the midst of nine-day 14.1 percent winning streak and the bullish sentiment seems to have infected Citi options as well.
Bullish order flow was also seen in CNO Financial Group (CNO), Eastman Kodak (EK), and AIG.

Bearish Flow
Put volume picked up in Garmin (GRMN) Thursday. Shares lost 35 cents to $30. Options volume jumped to 3.5X the average daily levels. 5,760 puts and 1,040 calls traded on the maker of navigation equipment and maps. December 30 puts were the most actives. 1,137 traded and, with 64 percent hitting on the bid, some investors might have been selling-to-close positions. The contract is at-the-money (stock price equals strike price) and has six trading days of life remaining. If it holds at $30 or above, the puts will expire worthless. However, January 30, December 31, and December 32 puts were active as well and trading predominantly at the ask. So, some investors appear to be buying put premium and possibly bracing for some short-term weakness in GRMN.

Bearish flow also picked up in US Steel (X), Mead Johnson (MJN), and Astra Zeneca (AZN).
Index Trading

Although there wasn't much volatility today, there was an increase in options activity in the index market. 529,000 calls and 624,000 puts traded across the S&P 500 Index (.SPX) and other index products, according to Trade Alert data. The CBOE Volatility Index (.VIX) lost .49 to 17.25. Meanwhile, the biggest index options trades of the day were in the VIX and printed very late in the day after one strategist bought VIX January 20 calls at $2.20 and sold January 20 puts at $1.90, 31,820X. This combo, for a net debit of 30 cents, looks like a new position and would give the strategist a position similar to buying the VIX itself. However, it isn't possible to buy SPX, VIX or other cash-settled indexes (but you can buy their futures contracts).

ETF Trading
The biggest trades in the exchange-traded funds [ETF] group Thursday was in the Financial Select Sector ETF (XLF). Shares finished up 19 cents to $15.62 and near session highs. Meanwhile, in options action, one strategist apparently bought 44,470 January 16 calls at 28 cents and sold 44,470 December 16 calls at 4 cents. This calendar or timespread might be a roll out from December to January. It might also be opening and a bet that shares will hold below $16 through next week's expiration, then rally through January. Selling the December 16 calls helps to finance part of the purchase of the bullish position January 16 calls.