Is Market Getting Too P/C? 05-11-2011

Cusick's Corner
The market was not able to muster much of a bounce off the lows, all the major indices closed in the red. Short Dollar players got squeezed today and the Euro currency has broken, which only ratcheted up the pressure on the uber hot commodity markets. While this dynamic can change on a dime, I see more and more skeptics in this market which can be highlighted by the sentiment shift in the Put/Call Ratio to .956, well off the opening lows of .70. Now I take this all with a grain of salt (and a short-term perspective), but I also respect the moves that are being made, there are red flags that should be heeded. See you Midday.

Stock market averages finished with losses Wednesday. Exxon (XOM) and Chevron (CVX) were among the biggest losers in the Dow Jones Industrial Average following a sharp drop in oil prices. Crude is off $4.79 to $99.09 late-Wednesday following today's bearish inventory data and after the buck bounced against the euro. The European currency is trading down 1.5 percent against the dollar amid ongoing anxiety about the European debt problems. Gold lost $14.40 to $1,502.50 an ounce. On the economic front, data released this morning showed the nation's Trade Balance at -$48.2 billion in March, which was up from $45.4 billion the month before and also worse than the $47.7 billion deficit that was expected. Meanwhile, Disney (DIS) lost 5.4 percent and was the biggest drag on the Dow Jones Industrial Average after the media giant's earnings fell short of expectations. At the end of the day, there wasn't much fodder for the bulls Wednesday. The Dow Jones Industrial Average gave up 130 points and the tech-heavy NASDAQ lost 26.8.

Bullish
Cisco Systems (CSCO) shares are trading up late-Wednesday following a day of very heavy trading in Cisco options. 546,000 calls and 349,000 puts traded on the networking giant today. Shares finished down a penny to $17.78 and May 17 calls, which were 78 cents in-the-money at the closing bell, were the most actives. 76,400 traded on the day. Another 63,300 May 18 calls changed hands. May 17 puts traded 61,990 contracts. May options expire at the end of next week and some of the action was likely closing trades ahead today's earnings report. Other investors were probably taking positions in short-term options in anticipation of a big post-earnings move. After the closing bell today, Cisco shares are trading up 1.2 percent to $18 after the company reported a quarterly profit of 42 cents per share, which was 5 cents better than Street estimates.

Bullish trading was also seen in Genworth (GNW), Macy's (M), and Skecher's (SKX).

Bearish
A hefty trade surfaced in Office Depot (ODP) January 2013 options. Shares settled the day up 14 cents to $4.41 and one investor sold 10,000 January (2013) $4 puts at 85 cents and sold 10,000 Jan (2013) $4 calls for $1.25. Therefore, they sold the Jan $4 straddle at $2.10, 10000X. Since there is very little open interest in these two contracts, this looks like an opening sale. If so, the investor is possibly looking for shares to drift down to $4 through the January 2013 expiration. The profit range of this short straddle is between $1.90 and $6.10 at the 2013 expiration. So, this is not aggressively bearish, but rather a bet that shares won't make a major move higher or lower.

Bearish flow also surfaced in Toll Brothers (TOL), DR Horton (DHI), and Computer Associates (DHI).

Index Trading
Investors showed a bit more interest in index puts today. 438,000 calls and 581,000 puts traded across the S&P 500 Index (.SPX), S&P 100 Index (.OEX) and other cash indexes. The S&P 500 lost 15.08 to 1,342.08 and the most active index options were SPX puts. May 1,300s, which are 3.1 percent out-of-the-money and expire in a little more than one week, were the most actives. 39,271 traded. May 1,200 puts, which are 10.6 percent OTM, traded 23,220 contracts. Meanwhile, CBOE Volatility Index (.VIX) hit a high of 17.49 today and finished the day up 1.04 to 16.95. It seems that hedging activity picked up a bit today, which is not unusual given the volatility in financial markets Wednesday.

ETF Action
CurrencyShares Euro Trust (FXE) saw heavy trading, on a rough day for the European currency. The euro lost another 1.5 percent against the dollar and FXE, which tracks the currency pair (X100), gave up $1.95 to $141.49. FXE has now suffered a one-week 4.2 percent drop. Meanwhile, options volume in FXE hit 4X the average daily today. 70,000 puts and 4,000 calls traded on the ETF. June 136 puts, which are now 3.9 percent out-of-the-money, were the most actives. 25,990 traded. Some investors might be taking positions in these puts on concerns about additional losses in the euro in the weeks ahead. June options expire in 37 days.