Friday the 13th Somewhat Scary in the Markets 05-13-2011

Cusick's Corner
Here's something to look at over the weekend, check out options volatility ahead of earnings. Log into your optionsXpress account and check out the Volatility View chart, plus go to our Options Chains to see the Implied Volatility & Greeks on a strike-by-strike basis. Stocks coming out with earnings next week - like CHS, HD and WMT are experiencing higher implied volatility. I will talk about this tomorrow at our optionsXpress Workshop which we will be simulcasting live online for you. So join the fun and you don't have to attend all day, stay for part of the day - just hop on for an hour. To see the Agenda and register for this simulcast, use this link http://www.xpressevents.com/EventScheduleList.aspx?EventId=264 and while you are online tomorrow, send in a question or give us your opinion via the live chat. See you online! Have a great weekend.

Friday the 13th was somewhat scary on Wall Street, as stock market averages finished with steep losses on the session. The day's economic news wasn't bad. Data released early showed the Consumer Price Index for April at .4 percent and in-line with expectations. Meanwhile, the University of Michigan Consumer Sentiment Index increased to 72.4 in mid-May, from 69.8 last month and ahead of expectations (of 69.5). Yet, stocks struggled with a number of high profile tech stocks falling on bad news. Rambus (RMBS) lost 17.9 percent on a disappointing court ruling. Yahoo (YHOO) lost 3.6 percent on worries about the company's investment in China's Alibaba group. Late yesterday, Yahoo said it was not informed of Alibaba's transfer of control of an online payment unit. NVidia (NVDA) lost 11 percent after the company reported better-than-expected earnings, but some analysts expressed concerns about the slowdown in the company's core graphics business unit. The sliding euro also weighed on sentiment. The European currency gave up 1 percent on the dollar amid ongoing worries about the European Debt Crisis. Within the Dow Jones Industrial Average, twenty five stocks moved lower, five finished higher. JP Morgan (JPM), Traveler's (TRV) and BofA (BAC) were the Dow's biggest losers and the industrial average gave up 100 points. The tech-heavy NASDAQ lost 34.6.

Bullish
Noble Corp (NE), an oil and gas driller, saw heavy trading today. Shares added just 2 cents to $39.59 on the session. Meanwhile, 13,000 calls and 560 puts traded in the name. May 40 calls, which are 1 percent out of the money and expire in a week, were the most actives. 6,360 traded. Another 4,950 May 41 calls changed hands. June 43 and 50 call options were busy as well. There was no news on the stock today. Shares have been slumping along with oil prices lately and are down 13.2 percent since early-April. Some investors might be taking bullish positions in short-term calls in anticipation of the company's Analyst Day, which is slated for May 17 and before the expiration.

Bullish trading was also seen in Whirlpool (WHR), Eastman Kodak (EK), and Consol Energy (CNX).

Bearish
Costco (COST) shares touched a new 52-week high Friday morning, but then retreated to finish the day down 60 cents to $82.72. Meanwhile, options volume in the retailer hit 7X the average daily. 44,000 puts and 2,500 calls traded in Costco. A large spread trade was seen. In this position, the investor sold 30,000 July 70 puts at 25 cents and bought 10,000 October 75 puts at $2. This 1X3 put ratio spread is probably rolling of a position out a few months and up five strikes. On February 22, 20,000 July 70 puts were bought at $1.13 each. Shares have rallied 12 percent and time decay has also taken a toll on those puts. They're being closed at a hefty loss while a new position is opened in the October 75 puts. A shareholder might be initiating these put purchases to hedge Costco shares.

Bearish flow also surfaced in NVidia (NVDA), Prologis (PLD), and Mellanox Tech (MLNX).

Index Trading
CBOE Volatility Index (.VIX), which tracks the expected volatility priced into S&P 500 Index (.SPX) options, hit a morning high of 17.56 and finished up 1.04 to 17.07. The S&P 500 slid 10.88 points to 1,337.77 and gave up just 2.3 points on the week. Yet, while the S&P 500 didn't move much since last Friday, VIX options activity seems to reflect some investor expectations for another increase in market volatility going forward. Options volume in the volatility index today was 282,000 calls and 42,000 puts. July 25 and 32.5 calls were the most actives and the top trades were part of a spread, in which the investor bought a 25,000-contract block of July 25 calls at $1.63 and sold 25,000 July 32.5 calls at 83 cents. The spread, for a net debit of 80 cents, looks like a bullish play in anticipation of another spike in VIX between now and July.

ETF Action
Select Sector Energy Fund (XLE) has had a rough stretch, but at least one investor seems to be looking for a rebound in shares in the months ahead. XLE is an exchange-traded fund that holds all of the energy-related names from the S&P 500 and lost 36 cents to $73.79 Friday. Shares have been following the price of crude lower in recent days and have now suffered an 8.3 percent month-to-date loss. In options trading, a noteworthy spread trade surfaced in the XLE Friday morning when an investor bought 54,000 September 79 calls on the fund at $2.23 and sold 54,000 September 90 calls at 28 cents. They paid a net debit of $1.95 for the spread and apparently looking for a rebound in shares through the September expiration. The position offers a potential $9.05 pay-off (excluding commissions), if shares rally to $90 or beyond during that time.