Spike in VIX Put Buying 02-17-2011

Cusick's Corner
The market continued to set new highs and insurance is starting to be a consideration. The VIX closed 16.59 -.13 and was in the green for the latter part of the day. There was a slight influx of some VIX put buying in spite of the continued challenge to the upside. While this is not a strong indication that the market is in turn mode, it is an indication that certain strategists are willing to pay for some insurance. Review your portfolio and trading plan this evening, check if there are names or sectors that might need some potential insurance. Also tomorrow is Friday Expiration -- settlement in the AM for European indices and at the close of trading for equity options, so manage your risk if you have expiring February options. There is no data coming out tomorrow but Expiration always leaves the door open for some surprises. See you Midday.

The bullish momentum continued Thursday despite a round of mixed economic news. Data released before the opening bell on Wall Street showed the Consumer Price Index [CPI] up .4 percent in January, which was .1 percent more than expected. Separately, the Labor Department also reported that weekly jobless claims increased by 25,000 in the period ended February 12, which was roughly in-line with expectations. Later, the List of Leading Indicators came in at .1 percent for January and below economist estimates of .3 percent. However, the Philadelphia Fed Survey of manufacturing activity was a bright spot. It surged to 35.9 in February, from 19.3 last month and significantly better than the 21.0 that economists had expected. Trading was mixed on the data and into midday. Then, buyers re-surfaced in the second half of trading and, at the closing bell, the Dow Jones Industrial Average had added another 30 points. The tech-heavy NASDAQ gained 6.

Bullish
AMD sees another day of heavy trading. Shares added 45 cents to $9.44 today and 9.5 percent so far this week. Meanwhile, options volume was 3X the average daily. 81,000 calls and 26,000 puts traded on the chipmaker. March 10 calls were the most actives after more than 19,000 contracts. Some players appeared to be opening new bullish positions and looking for the recent rally in AMD to continue over the next four weeks, into the March expiration. The heightened activity might be in reaction to a BusinessWeek story today suggesting that the chipmaker has been the subject of recent takeover speculation. However, the piece warned that AMD could seek three times the typical takeover premium, which might put off potential buyers.

Bullish trading was also seen in Nabor's Industries (NBR), Family Dollar (FDO), and EBAY.

Bearish
Yingli Green Energy (YGE) might be a name worth watching Friday morning. The company is due to report earnings and put volume jumped ahead of the news. The action included a morning buyer of 5000 February 13 puts at 45 cents each. Shares finished down 14 cents to $12.84 and 5,854 contracts traded on the session. Open interest is 1,367 and therefore today's action seems to be new positioning. If so, it's a bold move because earnings are reported in the morning and February options cease trading tomorrow afternoon.

Bearish flow also surfaced in Microchip (MCHP), Human Genome Sciences (HGSI), and Hornbeck Offshore (HOS).

Index Trading
The CBOE Volatility Index (.VIX) edged down .13 to 16.59 as the options expiration has failed to stir up much market volatility so far. The S&P 500 Index (.SPX) added 4.11 to 1,340.43 on the session. Meanwhile, the top trades in the index options pits today were in VIX March calls. In this ratio spread, the strategist apparently bought 15,000 March 21 calls at $1.00 and sold 30,000 March 30 calls at 30 cents. This 1X2 call spread, for a net debit of 40 cents, is a bullish play. The best pay-off occurs if VIX settles at 30 at the March expiration. While the debit is lost if VIX fails to move beyond 21 by the expiration, there is also additional risk to the upside if the volatility index makes a substantial spike. The risk is due to the fact that only half of the 30 calls are covered by the 21s.

ETF Action
iShares Emerging Markets (EEM) puts were actively traded today. The fund, which holds shares of companies from developing countries, is up 16 cents to $46.03. Meanwhile, 367,000 puts and 133,000 calls traded in the fund. June 43 puts saw noteworthy action. One investor bought 40,000 at $1.51. Another (or maybe the same investor) bought 20,000 contracts at $1.48. At the end of the day, 70,558 traded. Open interest is 36,919 and, since the contract is $3.06 out-of-the-money, a portfolio manager holding a big position in emerging market stocks might have initiated the trades.