Using the Euro as a Barometer 05-10-2011

Cusick's Corner
The market bounced this morning after a brief breach of support, 1340 level for the June S&P and 134 level for the SPY; back up on a weak Buck and the promise of continual economic growth. The short-term market action needs to break current resistance, 1350 on the June future, if the upside is going to have a fighting chance. The currency to watch is the Euro, FXE, this has been the barometer of how oil and the market has been trending. If risk in the PIIGS nations further increases this could pressure the Euro, possibly resulting in the market coming under some decent pressure. See you After Hours.

Stock market averages opened higher on Wall Street after data showed China's trade surplus increasing more than expected. The report showed the Chinese economy logging an$11.4 billion trade surplus in April, which was four times more than expected. The news seemed to help ease some concerns about economic activity in the world's second largest economy. In the US, the early focus was on import price data that showed a 2.2 percent increase in April, which was .7 percent more than expected and marks the first time prices have increased by more than 2 percent since July 2008. Separately, a report on Wholesale Inventories increased by 1.1 percent in March was slightly more than the 1 percent that was expected. The day's other news is mixed. Microsoft (MSFT) is lower after announcing plans to acquire Skype for $8.5 billion. Gold gained $13.10 to $1,516.30 an ounce and silver added $1.23 to $38.35. Crude oil is steady at $102.70 per barrel. Twenty-three Dow stocks are higher, seven lower, and the industrial average is up 43 points. The tech-heavy NASDAQ gained 16. The CBOE Volatility Index (.VIX) gave up another .74 to 16.42 and is down 10.8 percent on the week. Trading in the options market is picking up from slow action seen Monday, with 6.3 million calls and 3.3 million puts traded through 12:45pm ET.

Bullish Flow
Microsoft (MSFT) is down 1.3 percent to $25.50 and the biggest loser in the Dow Jones Industrial Average after the company announced plans to buy Skype. Microsoft is paying $8.5 billion for the Internet phone company. Yet, while shares are down on the news, options order flow seems to reflect some bullishness. 135,000 calls and 52,000 puts have traded in Microsoft so far today. May 26 calls, which are now 50 cents out-of-the-money [OTM] and expire in 10 days, are the most actives. 23,870 have changed hands. January 2013 calls at the 30 and 32.5 strikes are seeing brisk trading as well. Looks like investors are taking positions in Microsoft long and short-term OTM calls on today's Skype buyout news.

6.3 million calls and 3.3 million puts traded through midday Tuesday. Therefore, the total put-to-call ratio is an anemic .52. However, while the ratio seems to reflect high levels of bullishness, it's important to note that it is being distorted by heavy ex-dividend related trading - which is an institutional strategy designed to profit from the fact that not all calls are exercised to capture the dividend. Pfizer, for example, goes ex-div tomorrow and today's options volume includes 1.9 million calls. By way of comparison, 12,000 puts have changed hands. Boeing (BA), Walmart (WMT), and Eli Lilly (LLY) are among the other names seeing unusual volume related to dividends.

Bearish Flow
Dow Chemical (DOW) is up 74 cents to $40.58 and today's options volume is 3X the average daily. 46,000 puts and 3,580 calls have traded in the chemical company. Much of the volume is due to one spread trade. In this strategy, the investor apparently bought 9,970 September 37 puts at $1.47 and sold three times as many (29,760) as many of the June 35 puts at 22 cents. This looks like a roll. That is, the investor was closing out a bearish position (or hedge) in the June 35 puts and opening a new smaller one at the September 37 puts. They're rolling out three months and up two strikes.

S&P Oil and Gas Exploration and Production ETF (XOP) shares have added 32 cents to $60.12 and put options on the fund saw interest early Tuesday. The focus is on the December 56 puts. One player bought 6,100 at $4.15 per contract, according to a source on the exchange floor. 12,600 now traded. Open interest is only 120. So, this looks like opening activity. Since XOP holds shares of companies like Exxon (XOM) and Chevron (CVX), today's put buying might reflect bearish bets or hedging activity against the major oil names.

Unusual Volume
AIG options volume is running 2.5X the (22-day) average, with 65,000 contracts traded and call volume accounting for about 85 percent of trades.

Boston Scientific (BSX) options volume is 9X the average daily, with 51,000 contracts traded and put volume representing for 57 percent of the activity.

Dow Chemical (DOW) options volume is running 3X the average daily, with 48,000 contracts traded and put volume accounting for 95 percent of the activity.

Increasing options activity is also being seen in US Airways (LCC), Clearwire (CLWR), and Lowe's (LOW).

Implied Volatility Mover
Biometric Therapeutics (BMTI) shares plummeted and implied volatility jumped ahead of an FDA decision regarding the company's home-graft device. There's apparently talk that the FDA has some concern about the safety and risk/benefits of the device. Shares sank 35 percent to $8.66 Tuesday morning. 14,000 calls and 12,000 puts traded in the name. Implied volatility is up 44 percent and is very elevated at 220.