Measuring Demand for Market Protection 07-25-2011

Cusick's Corner
The sellers were out this morning and while the selling has tapered off, it still cannot be overlooked. Longs are looking like they are getting nervous, potentially taking some profits as the Debt debate continues and the Chinese are signaling some mixed data. Market players on the long side are going to start feeling the need to hedge and if that is the case, you may see a move in Volatility, VIX 19.22, and Put/Call ratios, .94, possibly causing an increase in the price of insurance (i.e. Puts). Watch 1332 into the After Hours, if the selling gets momentum then 1310-1300 could be challenged. See you After Hours.

Stock market averages are off session lows and showing only modest losses, but the overall tone of trading remains cautious midday Monday. The table was set for morning weakness on Wall Street after politicians failed to make progress on the budget impasse over the weekend. The August 2 deadline to raise the debt ceiling looms and there are growing concerns about the potential economic risks if the US defaults on its debt. The Dow Jones Industrial Average fell sharply after the opening bell sounded on Wall Street, but has since moved well off session lows. There isn't much other news to guide trading. The economic calendar holds not data today. Baker Hughes (BHI), Lorillard (LO) and Eaton (ETN) are among a handful of companies trading mixed on earnings news Monday morning. Meanwhile, the Dow Jones Industrial Average is down 38 points, but more than 100 points off session lows. CBOE Volatility Index (.VIX) is up 1.66 to 19.18. Trading in the options market is on the light side, with 3.8 million calls and 3.5 million puts traded through 12:30pm ET.

Bullish Flow
Broadcom (BRCM) is seeing heavy trading ahead of earnings. Shares are down 61 cents to $34.86 and today's options volume in the chipmaker includes 26,000 calls and 9,320 puts. The top trade of the day is a 1,300-contract block of January 34 puts, sold at $3.35 per contract on the CBOE. This looks like an opening play, as volume exceeds open interest. If so, the strategist is possibly looking for shares to hold above $34 through the January 2012 expiration and or is a willing buyer of the stock at $34. Beyond that, most of the options action has been smaller lots of call options in BRCM. August 32, 35, 37, 38 and 39 calls are busy, ahead of earnings - due after the closing bell today.

3,240 calls and only 60 puts traded on Skechers (SKX) through midday. Shares of the footwear maker are running 2 cents higher to $14.50. October $15 calls, which are 3.5 percent out-of-the-money, are the most actives. The action includes a morning buyer of 1,282-contracts at $1.05 each. 2,213 traded. September 15, October 16 and October 17 calls on Skechers are seeing interest as well. The bullish trading might be a play on earnings. The company is due to report results Wednesday afternoon.

Bearish Flow
AMR shares are drifting to new 52-week lows and are off 20 cents to $4.16 midday Monday. Options volume in the airliner is picking up as well. 16,000 puts and 7,810 calls traded in the name so far. November 5 puts, which are 16.8 percent in-the-money, are the most actives. 10,895 traded, including several blocks at the $1.06 asking price. Some players might be buying puts on AMR on concerns about additional losses for shares in the months ahead. Shares are on a four-day 15.6 percent skid since earnings were reported last Wednesday. AMR is down 31.4 percent in the past month.

August 15 puts on SPDR Financial ETF are today's most actively traded options contract. XLF, which is the exchange-traded fund that holds all of the financial-related names from the S&P 500, is down 9 cents to $15.23. 94,100 XLF August 15 puts have changed hands so far. The action includes a morning buyer of 59,000 contracts at 32 and 33 cents per contract. Some investors might be taking positions in downside puts on concerns about potential short-term weakness in the financials ahead of the August 2 deadline to raise the debt ceiling. August options expire in 25 days.

Unusual Volume
Express Scripts (ESRX) options volume is running 6X the (22-day) average, with 56,000 contracts traded and call activity accounting for 76 percent of the volume.

Broadcom (BRCM) options volume is 2X the average daily, with 26,000 contracts traded and call volume representing 74 percent of the activity.

UPS options volume is running 2X the average daily, with 29,000 contracts traded and call volume representing 55 percent of the total volume.

Increasing options activity is also being seen in Hasbro (HAS), Cheniere Energy (LNG), and DirectTV (DTV).

Implied Volatility Mover
CBOE Volatility Index (.VIX) is moving higher. VIX, which tracks the expected volatility priced into S&P 500 Index (.SPX) options, is up 1.45 to 18.97. The S&P lost 2.57 to 1,342.45 through midday. The jump in the volatility index reflects an increase in risk perceptions on Wall Street, which is probably related to uncertainty surrounding August 2 deadline to raise the debt ceiling - which is now a little more than one week away. Yet, while VIX is up, there are no signs of investor panic. The S&P 500 is drifting only modestly lower midday and volume in the index is 103,000 calls/223,000 puts, or about 75 percent the typical volume for the S&P 500 trading pit through midday.