Volatility the Norm Over Next Few Sessions 02-23-2011

Cusick's Corner
The market has firmed up into the Midday, holding at this time critical support of 1305 in the ESH11. While a bounce into the After Hours is not out of the question, resistance will kick in, 1315 on the ESH11, and market watchers and technicians will watch closely the breadth of any upside movement. Volatility is going to be the norm over the next few sessions as the turmoil in the Middle East continues. I am now hearing rhetoric of a protest potentially scheduled in Saudi Arabia for March. There's also continuing risk of heightened Crude prices for the foreseeable future, north of $100 which would have potentially serious economic implications if in fact that does occur. It may be worth game planning by either looking at some insurance or looking at LEAPS call options as a stock replacement strategy. I wrote a piece on this in Barron's column The Striking Price, “The Virtues of Long-Dated Call Options.” See you After Hours.

Stocks are broadly lower for a second day on disappointing earnings and ongoing worries about escalating civil unrest. Hewlett Packard (HPQ) is down 10.6 percent and the biggest loser in the Dow Jones Industrial Average after the computer maker reported earnings late yesterday. While the headline EPS number was above estimates, revenues growth fell short of expectations. Meanwhile, global equity markets remain volatile as the death toll from unrest in Libya, the world's 18th largest oil producer, topped 1,000. The spreading violence has sent crude oil prices above $98 a barrel Wednesday. On the economic front, a report released during market hours showed January Existing Home Sales at an annual rate of 5.36 million, from 5.22 million the month before and ahead of economist estimates of 5.22 million. The day's economic news did little to move the market. Instead, the focus seems to be on H-Ps revenue growth numbers, which comes the day after Walmart (WMT) fell on similar worries, and events overseas. The Dow Jones Industrial Average is down 104 points. The tech-heavy NASDAQ lost 40.5.The CBOE Volatility Index (.VIX) gained 1.75 to 22.55. The tone of trading in the options market is much more defensive, with 7.5 million calls and 7.4 million puts traded so far.

Bullish Flow
Ford Motor (F) shares are reeling. The stock is down 59 cents to $14.63 and has now suffered a five-day 9.1 percent losing streak. In options action, 207,000 calls and 152,000 puts have traded in the automaker. The top trades were part of a spread, in which the strategist apparently bought 25,000 April 15 calls at 62 cents and sold 25,000 March 15 calls at 36 cents. The spread, for a net debit of 26 cents, traded 50000X total and might be rolling action. After the decline in the share price, the strategist appears to be opening a new position in April and buying an additional month for the bullish trade to play out.

IMAX calls are busy today ahead of earnings. The company is due to release results tomorrow morning and today's options volume of 12,000 calls and 970 puts is 9X the average daily for IMAX. Shares are down 61 cents to $26.84 ahead of the news. Volume in the March 30 calls is approaching 8,000 contracts. March 27, 28 and 29 calls are seeing interest as well.

Bearish Flow
145,000 puts have traded on the SPDR Retail Trust (XRT) through midday. XRT, which is an exchange-traded fund that holds a basket of different retailers, is trading down $1.25 to $47.95 and March puts with strikes ranging from 42 to 49 are seeing heavy trading. April 44 and 47 puts are seeing interest as well. The action includes an April 44 – 47 put spread at 57 cents, 17000X in early morning trading. This looks like a short-term hedge and was well-timed, as the spread has already widened to 88 cents following today's decline.

Longtop Financial (LFT) is trading down $1.13 to $30.11 and it appears that some investors are concerned about additional weakness in shares of the Hong Kong based technology company. July 25 puts have traded 3,448 contracts. The top trade is a block of 2,700 at $1.10 when the market was 55 cents to $1.10. Open interest is only 6 contracts and so this looks like an opening buyer of out-of-the-money puts. No news on the stock. Shares are in the midst of a six-day 9.3 percent slide.

Unusual Volume
US Oil Fund (USO) options volume is running 2.5X the (22-day) average, with 331,000 contracts traded and call volume accounting for 69 percent of the volume.

Hewlett Packard (HPQ) options volume is 6X the average daily, with 205,000 contracts traded and call volume representing for 56 percent of the activity.

PBR options volume is running 3X the average daily, with 167,000 contracts traded and call volume accounting for 74 percent of the activity.

Increasing options activity is also being seen in EMC, Seagate Tech (STX), and Chevron (CVX).

Implied Volatility Mover
Citigroup (C) options are seeing a day of heavy trading. After losing 4.8 percent yesterday, the stock is down another 10 cents to $4.59 today. 596,000 calls and 554,000 puts have traded in the bank so far. While January 7.5 calls are the most actives, March and June 4.5 puts are seeing very heavy volume as well. Implied volatility is on the move, up 12.5 percent to 36.5.