Summer Swing 07-13-2011

Cusick's Corner
The reversal in the market pulled off all gains we saw in the Midday -- told you it's an interesting week. This also highlights that tightening risk is very important going into the end of this week. I am not surprised that there was a flight for safety or aversion to adding risk at this stage in the expiration week. The claims data and retail sales are going to be watched pre-market, anything north of 370-400K on the claims or data showing that consumers are not consuming will raise serious short-term red flags but may also speed up the conversation on the potential for QE3. The long and short of this action is that swing trades, verticals specifically, are in play. See you Midday.

Stock market averages moved higher with help from reassuring words from Federal Reserve Chairman Ben Bernanke, but finished well off the day's best levels Wednesday. Through midday, the Dow Jones Industrial Average was up triple digits after the head of the Fed told the House Financial Services Committee that further policy action might be needed to help the economy. The commentary fueled hopes for another round of policy action from the Federal Reserve. Meanwhile, European stock benchmarks closed higher and the euro gained 1.2 percent on the dollar on diminishing worries about the debt crisis. Strong economic stats out of China also seemed to help stocks on Wall Street in morning trading. However, through mid-afternoon, the Dow had given up a good chunk of its gains and, at the closing bell, was up just 45 points - down 119 points from its best levels. The NASDAQ gained 15.

Bullish
Gold was the word of the day in the options market today. A number of mining names saw heavy trading after the price of the yellow metal rose $19.4 to $1,581.70 and continued to set record highs. For example, 41,000 calls and 20,000 puts traded in Goldcorp (GG), a Vancouver-based miner. Typical options volume in GG is 15,000 contracts. Shares rallied $1.71 to $54.24 and October 57.5 calls were the most actives. 5,790 traded. The contract is now 6 percent out-of-the-money and some investors were likely buying these calls on hopes the stock can run beyond $57.5 through the October expiration. July 52.5, July 55, August 57.5, and October 55 calls on Goldcorp were actively traded as well.

Bullish trading was also seen in Yamana Gold (AUY), US Gold Corp. (UXG), and Newmont Mining (NEM).

Bearish
Dow Chemical (DOW) shares edged up 20 cents to $34.25 and 27,000 options traded in the name. The action included 10,000 calls and 17,000 puts. The top trade of the day was a 7,000-contract block of July 34 puts traded at 34 cents on the ISE. While the market was 34 to 36 cents at the time, sentiment data from the ISE indicate that a customer bought-to-open the position. 10,345 of the Dow Jul 34 puts traded on the session against 3,370 in open interest. The premium buying is interesting because these puts are 25 cents out-of-the-money and have only two trading days of life remaining. These investors might be expecting some type of negative news item in Dow Thursday or Friday.

Bearish flow also surfaced in Taiwan Semiconductor (TSM), Allscripts (MDRX), and Seattle Genetics (SGEN).

Index Trading
Trading slowed a bit in the index market today, but is likely to pick up again tomorrow ahead of the options expiration. Tomorrow is the last day to trade S&P 500 Index (.SPX) and many other cash index July options before the settlement values are computed Friday morning. 559,000 calls and 727,000 puts traded on SPX and other indices today. One index that saw heightened volume is the S&P 100 European Style Index (.XEO). The index is the same as the S&P 100 Index (.OEX), except the ticker symbol is backwards and the options settle European style; which means exercise and assignment can only happen at the expiration. OEX settles American-style like stock and ETF options. Therefore, exercise/assignment of OEX options can happen at any time until the contracts expire. 8,278 puts and 2,873 calls traded in the XEO today, which is about twice the average daily volume for the product.

ETF Action
iShares Silver Fund (SLV) saw a flurry of options activity, as shares gained $2.03 to $37.23. SLV is an exchange-traded fund that owns the white metal and silver prices surged $2.51 to $38.15 today. The impressive rally in silver triggered heavy trading in SLV options, with 331,000 calls and 140,000 puts traded on the ETF today. July 37 calls, which are now 23 cents in-the-money and expiring at the end of the week, were the most actives. 55,388 changed hands. July 38 calls and July 37 puts on the silver fund saw heavy trading as well.