Know Thyself 06-13-2011

Cusick's Corner
Lately I have had a new mantra, "Be an Optimist." However, there is not much on the financial landscape that makes me feel that way, nothing. But I remind myself that emotion is the very thing trading is all about. There are strategies that play to this very mood, .i.e. bearish strategies that will allow me to still stick with my new mantra. So sticking with my positive mantra, I am strategically looking at selling at-the-money call credit spreads and buying out-of-the-money put butterflies. Both strategies take advantage of increasing volatilities and bearish sentiments with fixed risk. If you are new to these strategies, jump into the Education Center to review the explanations of these strategies. See you After Hours.

Stock market averages opened higher following a round of corporate deal-making, but trading has turned mixed through midday Monday. With no economic data to guide morning action, stock news was in focus after Wendy's/Arby's (WEN) announced plans to sell its Arby's unit to a private equity firm. Meanwhile, VF Corp (VFC) announced plans to buy footwear maker Timberland (TBL) for more than $2.2 billion. After six consecutive weeks of losses, the Dow Jones Industrial Average opened higher, but then gave up most of the advance on news S&P has downgraded Greece. The Dow is up 11 points. The tech-heavy NASDAQ has forfeited all of its early gains and is down 3 points. The underlying tone of trading remains cautious and the CBOE Volatility Index (.VIX) is up .56 to 19.42. Trading in the options market is running about the typical levels, with 3.5 million calls and 3.5 million puts traded through 12:15pm ET.

Bullish Flow
Harvest Natural Resources (HNR), a Houston, TX oil and gas driller, is rallying around news that the company has discovered crude off the coast of Gabon. Shares are up $1.24, or 12 percent, to $11.75. Meanwhile, 4,900 calls and 360 puts traded in the name. June 12.5 calls are the most actives. 1,990 traded, and with 88 percent trading at the ask, as it appears that buyers are driving the action. If so, it's short-term trading, as the Jun 12.5 call is 6.4 percent out-of-the-money and expires at the end of this week. Upside call buyers are also showing interest in HNR June 15 and September 12.5 call options.

Yahoo (YHOO) shares are down a nickel to $15.15 and have now suffered an 18.3 percent loss in a little over a month. Meanwhile, in options action, a July 16 - 19 call spread was initiated at 29 cents, 13,000X. In this spread, the strategist apparently bought 13,000 July 16 calls at 37 cents and sold 13,000 July 19 calls at 8 cents. The spread is a bullish play, as it makes its best profits if shares rally to $19 or more through the July expiration. The upside breakeven (excluding commissions) at the expiration is at $16.29, or a 7.5 percent gain over the next 38 days.

Bearish Flow
Allscripts (MDRX), the Chicago, IL healthcare information services company, is down 2.9 percent to $18.67. There's no news on the stock to explain the relative weakness, but it increased put activity has accompanied the decline. 4,010 puts and 165 calls have traded in the name so far. June 18 puts are 3.4 percent out-of-the-money with four days of life remaining and are the most actives. 1,320 traded. June 20 and July 19 puts are seeing interest as well. Looks like some investors are initiating positions on concerns about additional weakness in MDRX in the short-term. The stock is already down nearly 17 percent since April 6.

Regions Financials (RF) lost 14 cents to $6 on reports the company's Board of Directors is investigating if the bank's executives delayed the disclosure of information related to soured loans during the financial crisis. Shares are down and January 7.5 calls on the regional bank are busy today. 15,190 have changed hands. Some investors are probably liquidating positions. The contract is falling $1.5 out-of-the-money and has open interest of 94,582, which is by far the largest position in RF options.

Unusual Volume
Novagold (NG) options volume is running 6X the (22-day) average, with 78,000 contracts traded and put volume accounting for about 98 percent of trades.

CH Robinson Worldwide (CHRW) options volume is 15X the average daily, with 22,000 contracts traded and call volume representing 100 percent of the activity.

Temple Inland (TIN) options volume is running 2X the average daily, with 18,000 contracts traded and call volume accounting for 51 percent of the activity.

Increasing options activity is also being seen in Guess (GES), Harmony Gold (HMY), and Atmel (ATML).

Implied Volatility Mover
CBOE Volatility Index (.VIX) is edging higher after the S&P 500 gave up early gains and is now down 1.07 to 1,269.91. The S&P is on a six-week losing streak and came under pressure mid-morning Monday after Standard & Poor's lowered the credit rating for Greek credit. The news put the European Debt Crisis back in focus. Consequently, VIX, which tends to move higher when the S&P 500 heads lower, is up .66 to 19.52. At these levels, the volatility index would close at levels not seen since late-March. Volume in VIX options is picking up as well. 176,000 calls and 53,000 puts on the index so far.