Water Balloon Toss 06-29-2011

Cusick's Corner
Today's action was like watching a fast paced water balloon toss competition (a great Fourth of July game). There will be quite a bit of data released over the next 12 hours that has the potential to add some volatility and the most notable releases are manufacturing data out of Japan (a good number bolsters recovery) and the Jobs data out of Germany. If either of these numbers comes in light this could pause this advance. Claims data also comes out tomorrow pre-market. Claims have been over the 400K level and if this does not start to show some improvement soon, questions will start coming in about the strength of the workforce, specifically payrolls, potentially flagging a weakening consumer. This is quite macro but these are the events that could move these markets as we start seeing traders leave their trading desks for the long weekend. (Full disclosure -- I am carrying a swing ratio spread that I initiated this afternoon.) See you Midday.

Solid gains across European markets, better-than-expected home sales data, and upbeat corporate news helped send market averages higher Wednesday. Stocks rallied across the Eurozone on news that Greek parliament approved austerity measures designed to avoid debt default. The euro also cheered the news and gained .45 percent against the dollar. Diminishing fears about spreading debt problems in the Eurozone helped set a positive tone for trading on Wall Street. The day's economic news included a report on Pending Home Sales, which was released at 11:00am ET, and showed a surprise jump of 8.2 percent in May. Economists were expecting a decline of .2 percent. Meanwhile, BofA (BAC) rose 3 percent and was the best gainer in the Dow Jones Industrial Average after the bank announced a settlement with mortgage investors. Monsanto (MON) and General Mills (GIS) rallied on earnings. Overall, the day's news flow was upbeat and helped send the Dow Jones Industrial Average higher for a third day. The Dow added 72 points and the tech-heavy NASDAQ gained 11.

Bullish
Visa (V) and Mastercard (MA) saw heavy options trading, as shares rallied on news that caps for debit card swipe fees are being raised to 21 cents from 12 cents. Expectations were for an increase to 16 cents. Visa surged to new 52-week highs and finished the day up $11.29 to $86.57. Options volume included 99,000 calls and 68,000 puts in Visa. Typical volume is about 47,000 contracts. Mastercard shares jumped to new 52-week highs and finished up $31.47 to $309.70. Options action in MA was 15,000 calls and 11,000 puts. The recent average daily volume in MA options is about 8,000 contracts. Most of the activity surfaced in afternoon action, as the news started making the rounds about an hour before the closing bell.

Bullish trading was also seen in Coinstar (CSTR), Kinross Gold (KGC), and Darden Restaurants (DRI).

Bearish
Saks Inc. (SKS), the New York-based department store, saw increasing options action today. Shares finished the day down 9 cents to $11.14. Options volume was 3,620 puts and 55 call options. Average daily volume in the retailer is about 500 contracts. Most of the action was focused on January 11 put options. 3,450 traded. The biggest trade was a 500-lot at $1.23 and traded on the International Securities Exchange [ISE]. Sentiment data from the exchange, known as ISEE, indicated that a customer bought to open the position. January 11 puts on SKS are now 14 cents out-of-the-money and have open interest of 652 contracts. Some shareholders might be initiating the put purchases on concerns about the short-term outlook for Saks shares.

Bearish flow also surfaced in KB Homes (KBH), Accenture (ACN), and Cabot Oil and Gas (COG).

Index Trading
Trading volume is picking up in the index options market, as some institutional investors are likely adjusting hedges before the second quarter comes to a close. Tomorrow is the last day for the Q2 and third quarter begins Friday. 645,000 calls and 648,000 puts traded on the S&P 500 Index (.SPX), Russell 2000 Small Cap Index (.RUT) and other cash-settled indices today, which is the highest volume so far this week. Meanwhile, the CBOE Volatility Index (.VIX), which tracks the IV of S&P 500 Index options, finished down 1.90 to 17.27 and is on a three-day 18.2 percent skid. Still, trading in VIX calls remains active. 274,000 call contracts traded on the volatility index today, which compares to 124,000 puts. August and July 25s were the most actives, as some investors are probably taking positions on VIX upside calls on worries about a potential uptick in volatility in the weeks ahead.

ETF Action
Trading was very heavy in the SPDR 500 Trust (SPY) today. 2.7 million puts and 1.05 million calls traded on the ETF. Shares added $1.11 to $130.72 and an interesting trade surfaced early after an investor sold 92,000 July 126 puts at 73 cents per contract. They also bought 46,000 July 123 puts at 40 cents and bought 46,000 July 129 puts at $1.45. In other words, they initiated a massive July 123 - 126 - 129 put butterfly spread for a 39-cent net debit. The 123s and 129s are the wings of the fly and the 126 is the body. The max payout happens if shares settle at $126 (body) at the July expiration. Since the SPY holds the S&P 500 names, the maximum gain is offered if the market declines by 3.6 percent over the next 16 days. The same spread traded again at 32 cents, 31000X. Consequently, total volume in SPY July 126 puts was 223,000 and today's most actively traded contract.