Money Flowing Out of Safety and Into Risk 01-12-2011

Cusick's Corner
Money is flowing out of safety and into risk, out of Gold/Bonds and into Stocks. Many of you are responding to this latest trend with a No Duh! The sector that warrants some review is Finance, XLF. This sector is critical for measuring the strength of this overall market move. XLF looks potentially ready to challenge the highs of $17 and has established support at $15. As I mentioned in the Midday, spreads could be the strategy of choice -- why? Let's look at this example: I am conservative, looking for the potential to make 11% return on risk capital and risk no more than 2% total account value, $10k. If I am looking at stock trading at $16.50, resistance is at $17, could look at potentially buying the 15 calls for 1.66 and offset the time decay by selling the 17 calls for .26. This expires in 30 days and will cost $140 with a profit potential of $60. This fits your 11% return on risk capital and the risk, if you let the spread go to $0 it is less than 2% of total account. This just shows that you could be conservative with options. See you Midday.

Major averages finished with solid gains following positive developments related to the European Debt Crisis. Spain's IBEX surged 5.4 percent Wednesday and helped pace an advance across the Euro-zone after a successful offering of Portuguese debt eased anxiety levels about credit strains across some of the Europe's highly indebted countries. The news seemed to help support some of the financials on US shores as well. JP Morgan (JPM) and BofA (BAC) shares led the Dow Jones Industrial Average to an 83-point gain. Chevron Texaco (CVX) and Exxon Mobile (XOM) also helped after crude oil made a run towards $92 a barrel. Meanwhile, the tech-heavy NASDAQ added 20.50 points ahead of earnings from tech bellwether Intel (INTC), Thursday after the closing bell.

Bullish
The impressive surge in NVidia (NVDA) shares continues. NVDA notched new 52-week highs and finished the day up $3.04 to $23.35. NVidia shares are now up 48 percent since the company unveiled a new chip a little more than one week ago. Options activity remains brisk. 168,000 calls and 116,000 puts traded on the chipmaker today, which is 5X the typical volume. January 22.5 calls were the most actives. Some players might be closing out positions. The contract is now 85 cents in-the-money and will expire at the end of next week. Due to the holiday Monday, there are now six trading days remaining before January 2011 equity options expire.

Bullish trading was also seen in PMC Sierra (PMCS), Mosaic (MOS), and Micron Technology (MU).

Bearish
Aixtron AG (AIXG), a German semiconductor and semiconductor equipment maker, touched a new 52-week high Wednesday and finished the day up $1.92 to $43.92. Shares have now surged more than 32 percent since December 21. Some investors might be looking to protect or hedge recent gains, as put options volume jumped in the name today. 4,374 contracts traded (compared to 707 call options). March 40 puts were the most actives. 1,222 changed hands. January, February and March 43 puts were busy as well. In addition, according to data from web site WhatsTrading.com, 68 percent of the day's put volume traded at the asking price, suggesting that put buyers were dominating the action and bracing for a possible move lower in Aixtron shares in the months ahead.

Bearish flow also surfaced in EBAY, Chimera Investments (CIM), and Williams Companies (WMB).

Index Trading
The CBOE Volatility Index (.VIX) is slipping. The market's “fear gauge” lost .65 to 16.24 today and has now fallen 7.4 percent since Monday. Meanwhile, VIX options remain actively traded. Another 253,000 calls and 216,000 puts traded on the volatility index today. The top trades were part of a spread, in which the investor apparently bought 12,000 March 25 calls at $1.65 and sold 24,000 March 30 calls at 90 cents. This 1X2 call ratio spread is a bullish play on the VIX and was repeated more than once. Consequently, VIX March 30 calls traded 60,700X on the session and were the day's most actively traded index options contract.

ETF Action
Interesting action surfaced in the iShares China Fund (FXI) Wednesday. The fund added 89 cents to $44.69 and 41,700 January 41 puts traded on the session. One investor bought 16,500 at 3 cents per contract. In fact, it appears that most of the action was driven by premium buyers. Open interest is 28,744 and so it looks like some investors were buying these very cheap puts. The premium is only three pennies because the contract is 8.3 percent out-of-the-money and due to expire at the end of next week. The probability that the contract will be in-the-money at expiration, based on Delta, is less than 5 percent. In other words, the chance that it will expire worthless is more than 95 percent.