Mitigating Some Currency Volatility 04-18-2011

Cusick's Corner
Currency markets have been put on notice -- what markets to consider? Look at Gold -- GCM11 or GLD could be a way to play some of this currency uncertainty/volatility. People often look at Gold as an inflation fighter but it also can be very important when currencies come under pressure, especially when some in the media refer to some currencies as worthless pieces of paper. Now you could use the gold futures market, GCM11, or you could use the gold ETF, GLD, or even a gold stock like ABX. Adding exposure to this market may mitigate some of the currency volatility that impacts your overall portfolio. See you Midday.

Stock market averages suffered losses, but finished well off of session lows Monday. The table was set for morning weakness on Wall Street after S&P downgraded US' credit rating to negative. The news surfaced thirty minutes before the opening bell on Wall Street. Prior to that, stock index futures were already under pressure after China raised reserve requirements, stocks fell across Europe on concerns about the Debt Crisis, and Citigroup (C) posted lackluster revenue numbers. Then, stock index futures fell sharply on the downgrade. The Dow Jones Industrial Average opened lower and fell as much as 248 points in morning trading. However, stocks found some modest support in afternoon action and, at the closing bell; the Dow was down 140 points, but 108 from session lows. The tech-heavy NASDAQ lost 29.3.

Bullish
Shanda Interactive (SNDA) shares surged Monday after the company announced plans for an initial public offering [IPO] of its Cloudary unit. The Chinese Internet media company did not yet specify the number of shares or the dollar amount it hopes to get for the online literature unit. SNDA hit a new 52-week high on the news and finished the day up $7.49 to $51.45. Options volume hit 8X the average daily. 4,530 calls and 1,030 puts traded in SNDA. Most of the action was across a variety of May call options with strike prices ranging from 40 to 55, as bullish traders reacted to the IPO news.

Bullish trading was also seen in Computer Associates (CA), Mittal Steel (MT), and Earthlink (ELNK).

Bearish
An interesting three-way spread traded in Advanced Micro Devices (AMD) today. Shares of the chipmaker lost 7 cents to $8.20 on the day. Meanwhile, one investor sold 7,500 October 10 calls at 40 cents. They also bought the October 6 - 8 put spread at 71 cents, 7500X. Therefore, they paid 31 cents for the package and with volume exceeding open interest in the three contracts, it appears that this is a bearish spread in AMD. However, the same investor also bought 400,000 shares of stock, according to a source on the exchange floor. Therefore, it's not a straight bearish bet, but more of a volatility play. Earnings come into play later this week (April 21).

Bearish flow also surfaced in General Motors (GM), STEC and Office Depot (ODP).

Index Trading
Trading volumes and volatility picked up in the index market Monday after S&P cut its credit rating on US debt. The news triggered a volatile reaction in the equity market Monday morning. Meanwhile, 565,000 calls and 560,000 puts traded across the S&P 500 Index (.SPX), the S&P 100 (.OEX) and other cash indexes. The CBOE Volatility Index (.VIX) hit a morning high of 19.07, but eased in afternoon trading and finished up 1.64 to 16.96. Meanwhile, the top (or biggest in size) options trade in the index pits Monday was a block of 20,000 VIX May 25 calls at $1.14 per contract, which might be a call buyer expecting volatility to remain elevated in the weeks ahead. May options on the VIX expire in 29 days. The last day to trade April options on the VIX is tomorrow.

ETF Action
Proshares Bullish Dollar Fund (UUP) added .20 to $21.66 on a good day for the buck. UUP is the exchange-traded fund that tracks the performance of the dollar against the euro, yen and a basket of other foreign currencies. Shares traded up on news of the S&P downgrade, as the move might drive US interest rates higher and help bolster the dollar. Meanwhile, noteworthy options trades in the dollar fund included a 10,000-contract block of May 22 calls at 12 cents. Another 10,000 contract block traded at 15 cents. Buyers-initiated both of these bullish trades in the dollar fund, according to a source on the exchange-floor. At the end of the day, more than 23,000 UUP May 22 calls had traded.