Dollar Strength Dips the Market 06-10-2011

Cusick's Corner
This is one of those moments where one side of the market gets to sit back and think things are fat and happy - dollar up, metals and market down. This is a moment, one to respect, and now the "whys" start to pop up, .i.e. the market is down because of bad data/weak sectors like Financials, Tech, etc., Gold down, strength in the Dollar (but the depth of the gap is perplexing). The volume is low on this leg, a relative positive, but I want to watch the close to see if the big longs look to further lay off some risk into the weekend. If you have precious metals or Crude positions, these markets are under pressure into the Midday. I will be traveling this afternoon and will post the After Hours on the blog, www.xpoundblog.com.

Bears resurfaced on Wall Street Friday. The day after stock market averages snapped a six-day losing streak, stocks opened broadly lower after data showed import prices unexpectedly increasing by .2 percent in May. The concern is that inflation from overseas is pushing up prices (inflation) in the US, just as other data on employment and manufacturing suggest the domestic economy is slowing. Meanwhile, European markets traded lower on worries about the unfolding debt crisis. The euro is down 1.2 percent against the buck and dollar strength is weighing on some of the commodities. Crude oil lost $2.64 to $99.29 per barrel and gold gave up $7.70 to $1,535. Meanwhile, the Dow Jones Industrial Average is down 144 points and trading below 12,000 for the first time since March. The tech-heavy NASDAQ lost 33.7 points. CBOE Volatility Index (.VIX) added .99 to 18.76. Trading in the options market is active and defensive, with 4 million calls and 5 million puts traded through 11:15 central time.

Bullish Flow
Elan (ELN) is seeing relative strength and bullish trading. Shares are up 7 cents to $10.35 and touching new 52-week highs today. The stock has now rallied 66.1 percent since mid-March. Meanwhile, options trades are eyeing the Irish pharmaceutical company today. 7,450 calls and 610 puts have traded in the name so far. June 11 calls, which are 6.3 percent out-of-the-money and expire in a week, are the most actives. 2,675 traded. October 10, January 14, and July 12 calls in ELN are seeing interest as well.

Call options on the PowerShares Bullish Dollar Fund (UUP) are actively traded today. Shares are up 17 cents to $21.38 on a day of notable weakness in the euro. The European currency lost 1 percent on the buck. While UUP tracks the dollar against a basket of currencies, it is heavily weighted towards the euro. Consequently, UUP is up and options volume in the exchange-traded fund is 26,000 calls and 1,860 puts. July 22 calls are the most actives. 7,770 traded. June 21, July 21, Sep 22 and Sep 23 calls are seeing interest as well.

Bearish Flow
Cisco Systems (CSCO) September 14 puts are today's most actively traded equity options contract. 33,100 contracts traded so far. The action includes a ratio spread, in which the investor bought 5,000 September 15 puts at 82 cents and sold 10,000 September 14 puts at 45 cents. They collected 8 cents on this 1X2 bearish ratio spread and seem to be opening a new position. Cisco shares touched a new 52-week low today and are down 20 cents to $15.11. The put ratio spread trader seems to be bracing for additional weakness in CSCO -- targeting a move to $14 through the September expiration.

SPDR Retail Trust (XRT) puts are heavily traded today. Shares of the fund, which holds more than 90 different retailers, is down 71 cents to $49.64 and today's options volume is 78,000 puts/16,000 calls. Much of the put volume is due to one spread trade, in which the investor bought 14,000 July 49 puts at $1.22 and sold 28,000 July 45 puts at 30 cents. Like the CSCO spread (above), this 1X2 put ratio spread is a bearish spread that probably targets the lower strike price through the expiration, or a move to $45 over the next five weeks.

Implied Volatility Movers
CBOE Volatility Index (.VIX) is up .76 points to 18.53 and has rallied 20 percent so far month-to-date. VIX is an index that tracks the expected volatility priced into S&P 500 Index (.SPX) options. It's sometimes called the market's "fear gauge" because VIX often moves higher when the S&P 500 falls. The S&P is down 14.52 points to 1,274.49 today and has lost 5.3 percent so far in June. Meanwhile, some investors seem to bracing for additional volatility in the days ahead, as 159,000 calls and 27,000 puts have traded in the volatility index today. June 20 calls, which expire next Wednesday, are the most actives. 37,000 contracts traded.

Unusual Volume
Novagold (NG) options volume is running 10.5X the (22-day) average, with 99,000 contracts traded and put volume accounting for about 98 percent of trades.

iShares Real Estate ETF (IYR) options volume is 3X the average daily, with 62,000 contracts traded and put volume representing for 81 percent of the activity.

Amarin Corp (AMRN) options volume is running 3X the average daily, with 39,000 contracts traded and call volume accounting for 65 percent of the activity.

Increasing options activity is also being seen in Community Healthcare (CYH), Bingham Exploration (BEXP), and HSBC (HBC).