Markets Cautious - DC on Hot Seat over Weekend 07-22-2011

Cusick's Corner
Today's session was rather mixed and stuck to a small range. Tech led today, so the NASDAQ showed up the Dow and SPX. However, all the major averages ended the week higher. Trading was cautious due to the continuing uncertainty about the deadlock over the August 2nd deadline to raise the debt ceiling. Credit rating agencies warned last week that the US triple-A credit rating is at risk if the US defaults and yet there's still a stalemate in the debate on Capitol Hill. There's no panic on Wall Street, but just don't get complacent. The VIX is below 18 now and could pop if news at home or abroad changes over the weekend. Check your positions and also look up next week's earnings releases on the earnings calendar in your optionsXpress account to see if there are any that could impact your strategies. Stay cool and be ready for when it gets hot.

Market action was mixed Friday. Several Dow components came out with earnings today. Caterpillar (CAT) closed down 5.78 percent and is the biggest loser in the Industrial Average after the company's profit report didn't live up to the Street expectations. Microsoft (MSFT), Verizon (VZ) and GE are also among Dow stocks seeing post-earnings losses. McDonald's (MCD) was a bright spot in the industrials, however, after gaining 2.33 percent on better than expected profit results. Still, the Dow Jones Industrial Average closed down 43.25. The tech-heavy NASDAQ has added 24.40 points. CBOE Volatility Index (.VIX) closed down .04 to 17.5 and trading in the options market was light.

Bullish
An impressive trade surfaced in Electronic Arts (ERTS) midday Friday. Shares of the video game maker closed up 4 cents to $23.93 and one investor initiated a January 20 - 27 bullish risk-reversal on the stock at 44 cents, 30000X. That is, they bought a 30,000-contract block of January 27 calls at $1.44 and sold 30,000 January 20 puts at $1. The trade looks opening because volume exceeds existing open interest in both contracts. It's not a straight bullish bet. The combo was also tied to 1.8 million shares at $23.96. Still, this massive combo seems to reflect expectations Electronics Arts shares will move higher through January 2012. ERTS earnings come into play next week, July 26 (after market).

Bullish trading was also seen in Murphy Oil (MUR), Nalco Holdings (NLC), and Boston Scientific (BSX).

Bearish
Like Electronic Arts, Juniper Networks (JNPR) is due to release earnings next Tuesday (afternoon) as well. Shares of the networking company closed up $.95 to $31.27. Unlike ERTS, options order flow in JNPR seems bearish today, as a 4,081-contract block of JNPR August 29 puts traded at 65 cents on the International Securities Exchange. Data from the exchange indicate the position was bought-to-open. 6,265 contracts have now traded and open interest is 2,265. The Aug 29 put on Juniper Networks is 8.2 percent out-of-the-money and expires in four weeks. Today's put buyers might be taking positions to hedge the earnings risk. Shares are down nearly 20 percent since Juniper's last profit report on 4/19.

Bearish flow also surfaced in Verizon (VZ), Medco (MHS), and General Dynamics (GD).

Index Trading
CBOE Volatility Index (.VIX) is drifting lower and volume in VIX options was light today, as earnings news has resulted in mixed trading and little overall movement for stock market averages. The S&P 500 Index (.SPX) closed up 1.22 points. CBOE Volatility Index, which tracks the expected volatility priced into S&P 500 options, is down .04 to 17.52. Over 94,000 calls and 80,000 puts traded in the VIX pit today. One of the top trades in the volatility index was part of a "tree" spread, in which the investor bought 20,000 VIX Sep 19 puts and sold 20,000 of both the Sep 18 and Sep 17 puts. This spread was initiated for 12.5 cents (credit) and offers a max pay-off if VIX settles at 18 at the September expiration.

ETF Action
iShares Emerging Markets Fund (EEM) lost .03 cents to close $47.65 and the top two options trades in this ETF were part of a spread, 17,000 August 47 puts traded on the 94-asking price and 17,000 August 44 puts traded on the 22-cent bid. It appears that a substantial Aug 47 - 44 put spread was initiated for a 72-cent net debit. If so, it's a bearish short-term play on the emerging markets that offers a max payoff (excluding commissions) of $2.28 if shares fall to $44 or less through the August expiration, which represents a decline of about 8 percent in shares of the emerging markets fund over the next four weeks.