VIX Remains Contained 03-14-2011

Cusick's Corner
Volatility, the VIX, remains contained, 21.13, and the market bounced off the lows, S&P June Futures 1990. The bulls garnered enough control to quell some of the fears that have recently entered the markets. With that being said, all eyes will be on the FOMC meeting tomorrow at 2:15 ET, and the scrutiny will be on the carefully worded opinion that will be due out. The biggest question on the minds of Fed watchers -- is dissension as great as it seems? We will see Midday tomorrow.

Stocks moved broadly lower early Monday, as investors are trying to assess the risks and earnings impact from last week's massive earthquake in Northeast Japan. The Nikkei stock market average lost more than 6 overnight and, before the opening bell on Wall Street, benchmarks were lower across Europe as well. Germany's DAX paced the decline after falling 1.75 percent. With no economic data or earnings of significance in the US, there wasn't much domestic news to drive the market action. Consequently, the Dow Jones Industrial Average followed overseas stock market averages lower Monday morning, but thanks to some strength in afternoon action, was able to close well off session lows. The Dow lost 51 points on the day and finished up almost 100 points from its worse levels. The tech-heavy NASDAQ gave up 14.6 points.

Bullish
NYSE Euronext (NYX) rallied and options action heated up Monday after Dealreporter wrote a story indicating that the NASDAQ OMX Group (NDAQ) might make a counter-bid for the exchange. NYSE is already in advanced talks with Deutsche Boerse about a deal. After hitting a low of $33.84 early, NYX rallied and finished the day up $1.58 to $36.55. Options volume hit 4X the average daily, as 68,000 calls and 29,000 puts traded on the exchange. March 38 and 39 calls were the most actives. Volume in both topped 11,000. Looks like short-term speculators were hoping for some type of announcement in the near future. Both of these March contracts are out-of-the-money and expire at the end of the week.

Bullish trading was also seen in Pfizer (PFE), Star Scientific (CIGX) and Trina Solar (TSL).

Bearish
Aflac (AFL) shares were under pressure today on worries about potential losses related to last week's earthquake. The company announced today that its Japanese offices are fully operational and it sees minimal impact to sales. Still, shares lost $1.65 to $53.90 Monday and options volume in Aflac rose to 6.5X the average daily. 13,000 puts and 5,300 calls traded on the insurance company. April 50 puts were the most actives. 4,690 traded. March 48, 50, and 55 puts were busy as well. Implied volatility rose 15 percent to 38, as investors in the options market seem to be bracing for additional short-term volatility in Aflac shares.

Bearish flow also surfaced in Cameco (CCJ), Toyota Motors (TM), and USEC (USU).

Index Trading
Options volume is picking in up market heading into the options expiration. In the index market, 911,000 calls and 932,000 puts traded on the S&P 500 Index (.SPX) and other cash indexes, which is about 1.5X the recent average daily. SPX lost 7.89 points to 1,296.39 and the CBOE Volatility Index (.VIX) added 1.05 to 21.15. The top index options trade of the day was in VIX May options, after an investor bought 25,000 May 25 calls and sold 50,000 May 30 calls on the VIX. This 1X2 call ratio spread is a bullish play, as it makes its best profits if the volatility index rallies to 30 by the May expiration. 500,000 calls traded on a very busy day for VIX options today. March options on the VIX expire Wednesday and Tuesday is the last day to trade.

ETF Action
iShares Japan Fund (EWJ) saw another day of heavy trading. Shares lost 7 percent to $10.05 and options volume surged to 33X the 22-day average. 439,000 contracts traded on the Japan ETF. The action included 248,000 calls and 191,000 puts. January $11 calls were the most actives and included a block of 50,000 traded on the 53-cent bid. More than 100,000 traded on the day and some investors might have been selling the calls on the view that a move beyond $11 in EWJ through the January expiration is becoming less likely after last week's devastating earthquake.