It's Getting Chop in Here 07-11-2011

Cusick's Corner
What does an animal do when it is cornered? It gets scared, might even cower, but more times than not it fights back which could best characterize the longs that are in this market now. VIX popped this morning, +15.4%, and the longs that were recently entering the market are in the red after two sessions of down drafts. So expectations from here are that we could get some whippy action and fundamentals, specifically earnings, will be the focal point. While this does not diminish the technicals, this most recent pullback has resolved the overbought nature of the market and the reality is that earnings always seem to overshadow the technicals. Mid-term support is still in place, 50-day moving average, on most of the major indices, so traders will keep an eye on that while we go through earnings and other headlines. See you Midday.

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 tumbled 1.7 percent against the dollar after bond yields rose across Italy and Spain. The concern is that the debt crisis is still spreading across the Eurozone and moving to larger economies. 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. Looking forward, attention turns to the earnings-reporting season. Alcoa (AA) unofficially kicks things off today. JP Morgan (JPM), Citi (C), and Google (GOOG) also report this week. Retail Sales and inflation data later this week pose some event risk as well. Consequently, anxiety levels were a bit elevated today and the Dow Jones Industrial Average suffered a 151-point loss. The tech-heavy NASDAQ gave up 57.2.

Bullish
Clorox (CLX) shares saw an impressive rally on heavy volume today. CLX jumped to a session high of $71.98 at 2:00pm ET time and finished the day up $1.93 to $70.05. Share volume reached 5.55 million. Typical daily volume in CLX is about 950,000 shares. Options on the consumer staples company saw a flurry of activity as well. 16,000 calls and 1,562 puts traded in Clorox today, a ratio of more than ten-to-one. July 70 calls, which are now 5 cents in-the-money and expiring at the end of the week, were the most actives. 4,597 traded. Jul 72.5, Aug 70, Aug 72.5, Oct 70 and Oct 72.5 call options were busy as well. The action is interesting, as there were no obvious headlines on the stock to explain the rally in shares and speculative options activity in Clorox today.

Bullish trading was also seen in Colgate Palmolive (CL), International Game Technology (IGT), and Petrohawk (HK).

Bearish
Stillwater Mining (SWC) shares sank and options on the Billings, MT metals and minerals company were heavily traded after the company updated its second quarter earnings guidance and announced plans to buy Peregrine Metals for $487 million. Shares tumbled 22.2 percent to $18.46 on the news. Meanwhile, options volume in SWC surged to 12X the average daily. 34,000 calls and 25,000 puts traded on the ticker today. While July 18 puts were among the most actives and traded 4,860 contracts, some investors seemed to view today's sell-off as an opportunity for bullish trades. August 22, July 19, July 20 and July 21 calls were heavily traded as well.

Bearish flow also surfaced in EBAY, DirectTV (DTV), and News Corp. (NWSA).

Index Trading
Options action picked up in the index trading pits today. 974,000 puts and 702,000 calls traded across the S&P 500 Index (.SPX), S&P 100 Index (.OEX), and other cash products, which is 1.2X the recent average daily volume for the index market, according to Trade Alert data. The S&P 500 lost 24.31 points to 1,319.49 and CBOE Volatility Index (.VIX), which tracks the implied volatility priced into SPX options, jumped 2.44 points to 18.39. S&P 500 September 1,320 puts were the most actively traded index contract, as some institutional investors were likely buying these at-the-money puts on concerns about further equity market weakness in the months ahead.

ETF Action
Puts on the iShares MSCI EAFE Index Fund (EFA) saw heavy trading today. EFA is an exchange-traded fund that holds shares of companies from Europe, the Far East and Australia. Shares traded down $1.81 to $58.02 on worries the spreading European debt problems will negatively impact earnings and share prices in the region. Meanwhile, 135,000 puts and 31,000 calls traded in the fund. August 54 puts, which are 6.9 percent out-of-the-money, were the most actives. 21,647 changed hands. August 55, 56, 57 and 59 puts saw action as well, as some players were buying spreads and puts on concerns about additional losses in the EFA from now through the August expiration which is in 39 days.