Political Turmoil Takes Over Market 07-11-2011

Cusick's Corner
Selling has been brisk this morning, especially strong after the talks broke over the weekend between the Democrats and Republicans, setting up for some serious battling as we get closer to the August date of missing a payment. The EU continues to be a thorn and early news this morning really put some volatility when Italy was signaling that they, too, are feeling the pain, and sparking a too big to fail discussion. This all spikes volatility and as the selling stays aggressive that environment will continue. With all these government meetings both domestically and internationally, the bears have the momentary advantage and going into this earnings season. You might want to take a look at insurance on your longs, and you might use vertical put spreads, specifically bear put spreads, offering fixed protection and taking advantage of selling options with big implied volatility and using this to offset the purchase of our protection. You could also do this as a standalone strategy if you have become bearish on the underlying. See you After Hours.

Stocks are broadly lower on macroeconomic uncertainties. After disappointing jobs data sent stock market averages skidding Friday, the table was set for morning weakness on Wall Street Monday after European stock benchmarks and the euro came under pressure. The euro is down 1.7 percent against the dollar after the cost of insuring Italy's debt hit records. The concern is that the debt crisis is still spreading across the Eurozone. In the US, with no economic data or earnings to guide the morning trading, some of the focus is also on the budget impasse in Washington. President Obama and congressional Republicans sparred over taxes Sunday and failed to make any progress towards a deal to tame the US debt situation. So the fear is over debt, at home and abroad, and the Dow Jones Industrial Average is down another 154 points. The tech-heavy NASDAQ lost 54.3. CBOE Volatility Index (.VIX) jumped 2.47 to 18.42. Options action is picking up and trading is defensive today, with 4.6 million calls and 5.5 million puts traded through 12:45pm ET.

Bullish Flow
Barclay's Bank (BCS) shares touched a new 52-week low and are down 83 cents to $14.97 amid concerns about the spreading of the European Debt Crisis. Meanwhile, options volume in the British bank is 16,000 calls and about 1,600 puts - a ratio of ten-to-one. July 15 calls, which are now nearly at-the-money and expiring at the end of the week are the most actives. 5,280 traded. 94 percent traded at the ask, suggesting buying interest. September 15, September 17, January 2013 17.5 and August 16 calls are seeing interest as well. Some investors might be bottom-fishing in the name after a 30.9 percent slide in shares since mid-February.

Petrohawk (HK), a Houston, TX independent oil and gas company, is trading down $1.06 to $23.50 and one investor sells 4,500 January 21 puts at $1.78 to buy 4,500 January 25 calls at $2.55. So, they paid 77 cents for this bullish risk-reversal. Open interest is sufficient to cover in both contracts and this is possibly a closing trade. However, since the stock price is roughly midway between two strikes, the combo might be a bullish position intended to profit from a rebound in shares from now through January 2012. The stock is down 6.2 percent over the past two days, but has been trending higher in recent months and hit a 52-week high of $27.45 in early-June.

Bearish Flow
News Corp. (NWSA) is down $1.18 to $15.57 and options are heavily traded in the media company. Shares are down 14.4 percent during the past four days amid the phone hacking scandal involving the company's News of the World weekly paper, which has since been closed. Options volume in NWSA at midday is 16,000 calls and 14,000 puts, and 6X the average daily volume for NWSA. July 15 pus, which are now 3.7 percent out-of-the-money and expiring in four days, are the most actives. 3,900 contracts have changed hands.

CurrencyShares Euro Trust (FXE) is down $2.18 to $139.86 in volatile trading Monday. FXE, which tracks the euro/USD currency pair (X100), is under pressure today after a jump in the cost of insuring Italy's debt hit new records amid increasing concerns of deepening problems in the Eurozone. In FXE options action, volume is 2.5X the average daily, with 46,000 puts and 9,015 calls traded on the ETF through midday. July 136, 138, and 139 puts are seeing brisk trading, as some investors seem to be bracing for additional downside in the European currency this week. July options expire in four days.

Unusual Volume
CurrencyShares Euro Trust (FXE) options volume is running 2.5X the (22-day) average, with 23,000 contracts traded and put activity accounting for 84 percent of the volume.

SPDR Healthcare ETF (XLV) options volume is 2X the average daily, with 54,000 contracts traded and put volume representing 99 percent of the activity.

Stillwater Mining (SWC) options volume is running 5X the average daily, with 24,000 contracts traded and call volume representing 70 percent of the total volume.

Increasing options activity is also being seen in Aetna (AET), Applied Materials (AMAT), and Novellus (NVLS).

Implied Volatility Mover
CBOE Volatility Index (.VIX) is up 2.74 to 18.69, as investors react to recent global macro-economic events and now brace for the earnings reporting season. Alcoa (AA) unofficially kicks things off with a report after the closing bell today. Google (GOOG), Citi (C) and JP Morgan (JPM) also report later this week. Some pre-earnings jitters might be setting in. The S&P 500 Index is down 25.36 to 1,318.44 and VIX, which tracks the expected volatility priced into S&P 500 Index options, is on a two-day 18.3 percent run higher.