Integrating Options into "Sell in May & Go Away" 05-02-2011

Cusick's Corner
What I do not like about the short-term action is that the market has been unable to hold the gains that we started off with and that we have had almost a week of indecision. Could this be the May syndrome of "Sell in May and Go Away"? If you sell in May and come back in September, you are turning on a market that is overall in a very bullish trend, thus there will be pockets that will do well regardless of the short- or mid-term action. Folks, that's why I am pushing hedging (I sound like a broken record) rather than outright liquidation. Now if you are questioning this action, stock replacement using longer term options allows you to continue to participate in the potential upside - you sell your stock position and in turn buy a call option to free up cash to make some alternative investments. I will be talking more about this concept over the upcoming week. See you Midday.

Stock market averages gave back early gains and finished with modest losses. News announced Sunday of Osama Bin Laden's death triggered a modest rally on Wall Street when markets opened Monday morning. Economic data helped as well. A report released thirty minutes into trading showed the Chicago PMI at 60.4 in April; which was down from 61.2, but better than the 59.7 that economists had predicted. A separate report on Construction Spending showed an increase of 1.4 percent in March and much better than the 0 percent that economists had expected. Yet, after the early advance, the morning rally stalled and stocks were trading mixed at midday. From there, trading was somewhat choppy and uneventful. At the closing bell, the Dow Jones Industrial Average had given up four points. The tech-heavy NASDAQ lost 9.5.

Bullish
Options volume picked up in Las Vegas Sands (LVS) today. Shares of the casino-operator added 50 cents to $47.51 on the session. Meanwhile, 74,000 calls and 30,000 puts traded in LVS. May 50 calls, which are 5.3 percent out-of-the-money [OTM] and expire in 18 days, were the most actives. 7,440 traded. June and Weekly 50 calls were the next most actives. The heavy trading in these OTM calls seemed to include a mix of both buyers and sellers. Meanwhile, the biggest options trades in Las Vegas Sands Monday were in the June calls and included a June 50 - 52.5 call spread, apparently bought at 74 cents, 730X. Overall, the options order flow seemed to reflect bullish short-term expectations for LVS. The increased activity comes ahead of earnings, due Tuesday afternoon.

Bullish trading was also seen in Forest Labs (FRX), Freeport McMoran (FCX), and Boston Scientific (BSX).

Bearish
Sandridge Energy (SD), an Oklahoma City, OK oil and gas driller, finished the day down 12 cents to $12.24. Options volume included 16,000 puts and 7,230 calls. The top trade was part of a spread, in which the investor bought 3,500 June 11 puts at 35 cents and sold 7,000 June 10 puts at 16 cents. Therefore, they paid 3 cents for this bearish 1X2 put ratio spread and might be looking for the stock to fall towards $10 through the June expiration. They might be hedging a position in shares and/or are also willing to buy the stock at $10, because only half of the June 10 puts (which were sold) are covered by the June 11 puts. Sandridge Energy's earnings come into play on May 4.

Bearish flow also surfaced in Tenet Healthcare (THC), Whole Foods (WFMI), and Masco (MAS).

Index Trading
The CBOE Volatility Index (.VIX) moved a bit higher today. VIX, which fell 16.9 percent in April and touched new 52-week lows of 14.27 last Thursday, added 1.24 points to 15.99 on the first day of May. The market's "fear gauge" moved higher, even as stock market averages posted gains early Monday on news that Osama Bin Laden had been killed by US forces in Pakistan. The event, while viewed as a positive for the US, might have raised some concern about the risk of potential escalating unrest in an already volatile environment in the Middle East. VIX might also be moving higher ahead of key jobs data later this week. ADP releases its monthly jobs data Wednesday. The Labor Department's monthly payroll report is slated for Friday.

ETF Action
Large call buyers in the Industrials Select Sector Fund (XLI) for a third day. Shares, which hold GE, United Technologies (UTX) and the other industrial names from the S&P 500, touched a new 52-week high early, but finished the day down 6 cents to $38.64. Meanwhile, more than 60,000 June 40 calls changed hands and 90 percent traded at the ask, indicating buying interest. The action might add to volume seen Friday, when 105,000 traded, and Thursday, when another 109,300 changed hands. Open interest in the contract is now 208,370 and by far the largest position in XLI. It's not clear what's driving the action, but the call buying since Wednesday seems to reflect expectations for XLI to move beyond $40 through the June expiration.