Classic Summer Mode 07-05-2011

Cusick's Corner
The markets were, well in summer mode. This is the type of action that one could expect into an employment number at the end of the week and with earnings coming. The market had low volume with choppy action and while the bid has been nibbling, the future data has been holding the run to the upside in check. This is one of the reasons that I have some bearish exposure to the S&Ps. See you Midday.

Trading was uninspired without much news to guide the market action Tuesday. After last week's five day 5.6 percent market rally, stock market averages slipped at the open and heading into a report on Factory Orders. The data, released at 10:00am ET, showed a .8 percent increase in May and had no noticeable market impact. Trading was mixed into midday and stock market averages dipped in afternoon trading, along with the euro, on news Moody's had downgraded Portugal. However, selling pressure on never really gathered any momentum and stock market averages held on to most of last week's big gains. At the closing bell, the Dow Jones Industrial Average was down just 13 points. The tech-heavy NASDAQ added 9.7.

Bullish
Tractor Supply (TSCO), the Brentwood, TN farm and ranch supply retailer, saw relative strength and increasing options action today. Shares rallied to fresh 52-week highs and finished the day up 5.5 percent to $71.52. Options volume was 11X the recent average daily volume. 3,720 calls and 1,333 puts traded in Tractor Supply today. July 70 calls, which are now $1.52 in-the-money, saw the most volume. 2,850 traded, and with 90 percent trading at the ask and open interest of 265 contracts, it appears to be opening call purchases in anticipation of additional gains in shares through the July expiration, which is 10 days from today. It's not clear what was driving the bullish action, as there was no news on Tractor Supply today. The company is expected to release earnings July 20, which is outside of the July expiration.

Bullish trading was also seen in HanesBrands (HBI), Molycorp (MCP), and Bunge (BG).

Bearish
NRG Energy (NRG) shares finished down 58 cents to $24.22 and put volume picked up in the Princeton, NJ electric utility. 4,900 put options and only 57 calls traded in NRG today. The action was heavily focused on the July 24 puts, which are now 22 cents out-of-the-money. 4,888 changed hands, including two blocks at .23 and .24 per contract when the market was 15 to 25 cents. The action appears driven by put purchases on concerns about short-term weakness in the stock. The company announced today that it had completed the refinancing of $3.9 billion of its first lien facilities, but it's not clear if the bearish flow was related to this news item. Some shareholders might simply be buying puts to protect recent gains. NRG is up 25.6 percent since mid-March.

Bearish flow also surfaced in Infosys Technology (INFY), VMWare (VMW), and International Flavors and Fragrances (IFF).

Index Trading
It was a quiet day in the index pits. 490,000 calls and 722,900 puts traded across the S&P 100 (.OEX), Russell 2000 (.RUT) and other cash indexes, which is only about 86 percent of the average daily, according to Trade Alert. The S&P 500 Index (.SPX) saw a noteworthy trade. The S&P gave up 1.79 points to 1,337.88 and, in options action, an investor paid $10.30 for an August 1320 - 1280 put spread. 20000X. That is, they bought 20,000 of the August 1320s and sold 20,000 of the August 128 puts on the index. Since the strike prices are 40 points apart, the spread offers a potential $29.70 payoff (40 - 10.3) if the S&P 500 declines to 1280 through the August expiration, which represents a market decline of 4.3 percent over the next 44 days (commissions excluded).

ETF Action
While one strategist bought the massive spread in the S&P 500 Index (.SPX), another eyed the S&P Depositary Receipts (SPY). SPX is an index which has options that settle for cash. SPY is an exchange-traded fund that can be bought and sold. Therefore, SPY options settle for shares. Both the SPY and .SPX track shares of the same five hundred companies. SPY lost 11 cents to $133.81 and a noteworthy spread in options on the ETF is an August 127 - 120 put spread, in which the investor bought 31,000 August 127 puts at 98 cents and sold 31,000 August 120 puts at 35 cents, 31000X. They paid a 63-cent net debit for the spread (plus commissions) and stand to make $6.37 if shares fall to $120 or less through the July expiration, which represents a 10.3 percent market decline over the next 45 days.