Skeptics 05-19-2011

Cusick's Corner
The dynamics did not change much during the afternoon session. If anything there was a sense that the bulls lost interest in challenging the upside, skeptics, in front of tomorrow's AM settlement of European index options and PM settlement of equity options. I am not convinced that this consolidative action will continue, especially with Japan due to announce policies on interest rates and money policy. Manage your expiring positions into this announcement. See you Midday.

Stock market averages opened higher on better-than-expected jobless claims number, but any rally attempts were held in check by a round of disappointing manufacturing and housing data. Before the opening bell Thursday, the Labor Department reported that filings for jobless benefits fell by 29,000 to 409,000 in the period ended May 14. Economists were looking for a decrease of 18,000. Stock market averages opened higher on the news. However, the day's other data released later disappointed. Existing Home Sales fell to an annual rate of 5.05 million in April. Economists were expecting an increase to 5.23 million from 5.09 million. The Philadelphia Fed Survey unexpectedly dropped to 3.9 in May, from 18.5 last month and well below projections of 18.0. Finally, the List of Leading Indicators was down .3 percent in April and also worse than the 0 percent that was expected. In the commodities market, crude oil gave up $1.61 to $98.49 and gold slipped $1.40 to $1,494.40 an ounce. The dollar index lost .5 percent. Still, the Dow Jones Industrial Average traded in a narrow range and finished up 45 points. The tech-heavy NASDAQ gained 8.3 points.

Bullish
A noteworthy trade surfaced in XL Group (XL) today. Shares of the Dublin-based property and casualty insurance company finished the day up 37 cents to $23.74. Options volume rose to 3X the average daily. 8,000 puts and 7,630 calls traded in the name. Most of the activity was due to one trade, in which the investor bought 6,325 June 24 calls at 48 cents and sold 6,325 June 23 puts at 48 cents. The two blocks traded on the International Securities Exchange, where ISEE sentiment data indicate that calls were bought, puts sold. With shares midway between the two strikes, the strategist paid even money for this Jun 23 - 24 bullish risk-reversal and is possibly anticipating a rally in XL shares between now and the June expiration, which is four weeks from tomorrow.

Bullish trading was also seen in Freeport McMoran (FCX), Expedia (EXPE), and Chiquita Brands (CQB).

Bearish
While XL Group was the subject of bullish trading, MGIC Investment (MTG) saw decisively bearish flow today. MGIC is a Milwaukee-based surety and title insurance company. Shares lost 11 cents to $7.69 and are now down 11.2 percent month-to-date. The recent decline in the share price is perhaps stirring up some bearish sentiment in the name, as almost 10,000 puts and 1,277 calls traded in MTG today. One of the top trades was an 881-contract block of Sep 8 puts at 99 cents on ISE, which was an opening buyer, according to ISEE data. 5,082 traded. ISEE also indicates that investors bought-to-open new positions in June 7 puts. It's not clear what driving the increased activity. Some shareholders might have initiated the trades in MTG puts to mitigate some of the risk of further losses in the stock.

Bearish flow also surfaced in China MedicalExpress (CCME), China Biotics (CHBT), and Franklin Resources (BEN).

Index Trading
Trading volume in the index pits was active today, as positions were being closed out ahead of the expiration. Many cash-settled indexes cease trading on the Thursday before expiration. 814,000 calls and 929,000 puts traded across the S&P 500 Index (.SPX), S&P 100 Index (.OEX) and other cash indexes, which is 1.6X the recent average daily volume, according to Trade Alert data. The S&P 500 finished with a 2.92-point gain to 1,343.60 and the most actively traded index contract was the SPX May 1,350 calls. More than 75,100 traded and some last minute premium sellers might be active in the contract before it expires worthless. The May 1,350 call is 6.4 points or .5 percent out-of-the-money. Meanwhile, selling in the SPX pits sent the CBOE Volatility Index (.VIX), which tracks the expected volatility of S&P 500 options, down .71 points to 15.52.

ETF Action
The Dow Jones DIAMONDS (DIA) saw more interest than usual. The exchange-traded fund is designed to track the Dow Jones Industrial Average, divided by 100. The industrial average added 45 points to 12,605 today and DIA shares gained 47 cents to $126.18. Meanwhile, options volume in the ETF hit 6X the average daily. 314,000 calls and 17,000 puts traded on the fund today. May 122, May 124 and May 125 calls saw heavy trading. A lot of this activity looks related to trading around a dividend. Shares go ex-dividend tomorrow. However, some investors might also be closing out positions in DIA in-the-money call options ahead of the expiration. Tomorrow is the last day to trade equity and ETF May options contracts before they expire Saturday.