Is Volatility Back? 05-20-2011

Cusick's Corner
This is expiration trade -- move on the open and then slither into the close with most traders covering their trades early. The market looks to be prepared to stay in a tight range, 1330-1336 on the June S&Ps, but if the bulls can break resistance of 1336, the squeeze could be on into the After Hours. With the Financials still lagging, coupled with today's pullback and Spanish elections this weekend, this market has few catalysts beyond the technical levels that we have discussed. See you After Hours.

Stock market averages are in the red, but well off session lows midday on options expiration Friday. With no economic data to guide the morning action, some of the focus early in the day was on the sliding euro. The European currency is down .7 percent against the dollar amid ongoing concern about the debt crisis. In the US, disappointing earnings news from Aeropostale (ARO) and Gap Stores (GPS) is weighing the retail sector. SPDR Retail Trust (XRT) lost 1.3 percent. However, some of the commodities have rebounded into midday. Crude is now up 39 cents to $99.32 and gold added $20.6 to $1,513 an ounce. The Dow Jones Industrial Average is down 32 points, but 87 points off session lows. The tech-heavy NASDAQ is off 8.5. The CBOE Volatility Index (.VIX) added .50 to 16.02. Trading in the options market today is busy due to the options expiration. 4.9 million calls and 5.3 million puts traded through 12:30pm ET. Today is the last day to trade expiring May 2011 options contracts.

Bullish Flow
Brocade (BRCD) is up and options are actively traded Friday. After the closing bell Thursday, the San Jose, CA data storage device maker reported a second quarter profit of 13 cents per share, which beat Street estimates by 3 pennies. Shares added 6.8 percent to $6.69 on the news. Meanwhile, options action in BRCD is brisk. 32,000 calls and 15,000 puts traded in the name so far. July 7 calls, which are now 4.6 percent out-of-the-money and expire in eight weeks, are the most actives. 13,800 contracts have traded through midday. June 6 calls, June 7 puts, and June 7 calls are busy as well.

Market Vectors Gold Mining ETF (GDX) hit a morning low of $54.54, but has rebounded and is up 63 cents to $56.23. Shares of the some of the gold miners bounced along with the yellow metal in late-morning trading Friday. Meanwhile, options volume is GDX is 79,000 calls and 22,000 puts. The top trades were part of spreads, in which the investor bought 2,340 June 55 calls and sold 2,340 May 55 calls. The spread has traded more than 10,000X and appears to be rolling activity, or closing out May 55 calls to open new bullish positions in the June 55s. Volume in the June 55s is now 23,500 contracts.

Bearish Flow
Officemax (OMX) is down 19 cents to $8 and setting new 52-week lows today. Shares came under fire following disappointing earnings from peer Staples (SPLS) earlier this week. OMX also took a 20 percent hit on 4/29 after its earnings missed expectations. Shares of the office supplies retailer have now tumbled 54.8 percent year-to-date. Options action today seems to reflect some bearish sentiment as well. 11,000 puts and 550 calls traded in OMX so far. Most of the action has been in smaller sizes. The top trade is a 548-contrtact lot of June 8 puts at the 40-cent asking price. 2,572 traded. August 9 puts and November 8 puts are seeing active trading as well.

SPDR Retail Trust (XRT) is down 65 cents to $52.67. Retailers are seeing relative weakness Friday following disappointing profit reports from Gap Stores and Aeropostale, which are trading down 16.8 percent and 15.2 percent, respectively. Options volume in XRT is 3X the average daily. 56,000 puts and 8,000 calls traded in the ETF through midday. The top trade of the day is an apparent ratio spread, in which the investor bought 9,000 June 51 puts and sold 18,000 June 47 puts. The position is a bearish play, as it makes its best profits if shares fall to $47 through the June expiration, which equates to a 10.8 percent drop over the next four weeks.

Unusual Volume
Salesforce.com (CRM) options volume is running 6X the (22-day) average, with 115,000 contracts traded and call volume accounting for about 66 percent of trades.

Sprint Nextel (S) options volume is 3X the average daily, with 99,000 contracts traded and call volume representing for 91 percent of the activity.

Akamai (AKAM) options volume is running 2.5X the average daily, with 71,000 contracts traded and put volume accounting for 52 percent of the activity.

Increasing options activity is also being seen in Corning (GLW), Aruba Networks (ARUB), and Ann Taylor (ANN).

Implied Volatility Mover
American Eagle (AEO) shares are down in sympathy with apparel retailer Aeropostale, which sank more than 15 percent on earnings news. AEO, which releases its results next week, is down $1.01 to $13.61. Options volume in American Eagle is 4X the average daily. 12,000 puts and 3,600 calls traded in the name so far. June 13 and 14 puts are the most actives. Meanwhile, implied volatility is up 15 percent to 46.5.