Market Both Popped Then Faded on News 03-18-2011

Cusick's Corner
Stocks rose earlier on the day after G7 central banks agreed to coordinate efforts in the currency markets to help weaken the Japanese yen. Japan continues to struggle with their crisis – however, there was not much focus on the news that Japan's nuclear alert level rose from 4 to 5 (on a 7 point scale). The buying later faded shortly after President Obama stated that the US and some of its allies were prepared to launch military action in Libya if the cease fire does not hold. The CBOE Volatility Index (VIX -1.93) was down for a second day, closing at 24.44 which was over -7% down. The number of shares traded on the NYSE this Expiration Friday was high with almost 2 billion shares traded. Existing Home Sales come out on Monday at 10:00am ET. Have a good weekend.

With no economic data to guide the action, events overseas and the options expiration drove a lot of the action Friday. The Japanese yen tumbled after G-7 members agreed on currency intervention. The yen had been rallying since last week's devastating earthquake and tsunami. A stronger currency hurts the export-driven Japanese economy and therefore officials agreed to take steps to slow its recent rally. Meanwhile, a ceasefire in Libya along with news of a JP Morgan (JPM) seemed to bolster investor sentiment as well. JPM was one of twenty-six Dow stocks to move higher and the industrial average added 84 points on the day. The tech-heavy NASDAQ added 7.6 points. Trading in the options market was very busy throughout the week amid high levels of volatility and ahead of the expiration. 11.1 million calls and 10.5 million puts traded on options Expiration Friday.

Bullish
Star Scientific (CIGX) options have been very busy this week. Shares added 39 cents to $3.64 Friday and have now doubled in the past two week. Friday's gains were motivated by news that an FDA panel said that menthol should be removed from the market due to public health risks. However, it isn't clear if the FDA will follow on the recommendation and, if so, it could take years to implement the law. CIGX, a cigarette maker, moved higher on the news and options volume included 16,000 calls and only 700 puts. April 4 calls, which are now 36 cents out-of-the-money, were the most actives. 4,190 traded. March and May 3 calls saw heavy trading as well.

Bullish trading was also seen in Cisco Systems (CSCO), Simon Property Group (SGP), and Emulex (ELX).

Bearish
It looks like some investors bought downside insurance in Allstate (ALL) today, as 5,100 puts and 870 calls traded in the name. Shares added 6 cents to $31.15 on the day, but lost 2.7 percent on the week, as concerns about the earthquake and tsunami in Japan triggered a sell-off in many of the insurance names Tuesday and Wednesday. Meanwhile, Friday's volume in Allstate options was focused on April and July 30 puts, which are $1.15 out-of-the-money. July 30 puts were the most actives. 2,800 traded. Another 1,452 April 30 puts changed hands. In addition, 61 percent of the day's put volume in ALL traded at the offer, according to data from web site WhatsTrading.com, suggesting that buyers dominated the action in ALL OTM puts Friday. This action looks opening and to reflect concerns about possible losses in Allstate shares in the weeks ahead.

Bearish flow also surfaced in Waste Management (WM), Career Education (CECO), and Excel Maritime (EXM).

Index Trading
The Dow Jones Industrial Index (.DJX) saw more volume than usual. Trading under the ticker DJX, the index tracks the Dow Jones Industrial Average divided by 100. It finished the day up .84 to 119.59 after the Dow gained 84 points on the session. Meanwhile, DJX options volume hit 2X the recent average daily. A large combination trade accounted for most of the activity, after an investor apparently bought 5,900 June 120 puts at $5.30 and sold 5,900 June 120 calls at $3.10. They paid $2.20 for the combo and possibly set up a position that is synthetically equivalent to being short the Dow at 12,000.

ETF Action
Ultrashort Japan Yen ETF (YCS) options have been busy over the past two days. Thursday, the action included blocks of March 15 calls traded at the 15 and 20 cent asking price. Open interest data indicate that new positions were opened. Then, Friday, shares rallied 64 cents to $15.34 and the March 15 calls were again busy after G-7 officials announced coordinated efforts to send the Japanese yen lower. In options action, several blocks of March 15 calls traded again at 35 to 45 cents on the news. Some savvy investors might have anticipated the G-7 announcement and bought the March 15 calls ahead of the news, and then sold the positions for a big percentage gain after the YCS ETF rallied Friday.