Squeeze Trade 05-26-2011

Cusick's Corner
Sorry folks -- the Midday edition was not emailed but it is posted on the blog, www.xpoundblog.com. I did get some emails about what I meant when I said yesterday that the market looks like it will "pop." I was referring to the upside and that is what we saw into the After Hours. The velocity of this up move is also what I would call a classic squeeze trade, where the shorts get squeezed out of the market. With the long weekend starting after tomorrow, I am not expecting a big trading day. But be careful because with a lack of volume, short-term pressures could be amplified due to the fact that market players are on the beach or manning the grill early. See you midday.

Trading was sluggish Thursday morning following disappointing economic news, but stock market averages finished with modest gains with help from Microsoft (MSFT). Data released early showed Gross Domestic Product increasing at an annual rate of just 1.8 percent during the first quarter of this year. Economists were looking for the gauge of the nation's economic activity to increase by 2 percent. Separately, the Labor Department reported that jobless claims increased to 424,000 in the week ended May 21. Economists were expecting a decline to 400,000 from 414,000. The weak data weighed on Wall Street early, but stock market averages moved to positive territory through midday after Microsoft (MSFT) gained 2 percent. Shares of the software maker helped both the Dow and the NASDAQ after activist fund manager David Einhorn told an audience at an Ira Sohn conference late Wednesday that the company's board should replace Chief Executive Officer Steve Ballmer. At the same time, Guess (GES), Tiffany (TIF), and NetApp (NTAP) rallied around earnings news. Beyond that, it was a rather light news day. The Dow Jones Industrial Average traded in a 123-point range, but added just 8 points on the session. The tech-heavy NASDAQ gained 21.5.

Bullish
Orient-Express Hotels (OEH) saw an interesting spread trade today. Shares of the hotel, restaurant and travel company added 34 cents to $11.38 and total options volume included 20,000 calls. By way of comparison, typical volume in the name is about a dozen contracts. The action was driven by spread trading. One investor bought 5,000 December 10 call options at $1.90 and sold 5,000 December 12.5 calls at 65 cents. So, they paid $1.25 for the spread and appear to be opening a new bullish position that offers a max payout if OEH rallies to $12.5 or more through the December expiration. The spread traded 10,000 contracts (20,000 total) on the day.

Bullish trading was also seen in Coach (COH), Marvell Tech (MRVL), and Guess (GES).

Bearish
Bank of Ireland (IRE), a Dublin-based regional bank, saw increasing put activity today. Shares lost a nickel to $1.61 and total volume was 9X greater than the average daily. 4,045 puts and 565 calls traded on the session. The top trade was an 834-contract lot of October 4 puts at the $2.55 asking price. 1,720 traded on the session and open interest is only 140 contracts. Similar activity was seen in January 3.5 and 4 puts. All of these contracts are in-the-money and volume exceeded open interest. Therefore, it appears to be opening activity on concerns about additional losses in shares of the bank. IRE has already plummeted 36.1 percent since April 4. Concern about the European Debt Crisis is probably the catalyst for the recent slide in the share price.

Bearish flow also surfaced in Harbin Electric (HRBN), Sandridge Energy (SD), and Rosetta Stone (ROST).

Index Trading
At the risk of sounding like a broken record, trading was slow in the index market today. After a bit of volatility Monday, volume and volatility have been light over the past few days. Today, for example, 446,000 calls and 556,000 puts traded across the S&P 500 Index (.SPX), S&P 100 (.OEX) and other cash indexes, which is about 92 percent the recent average daily volume, according to Trade Alert data. The CBOE Volatility Index (.VIX) slipped another .98 to 16.09 and is now almost 4 points below the levels seen Monday morning. Meanwhile, the July 1,300 and 1,320 SPX puts were the day's most actives. The S&P 500 finished the day up 5.22 points to 1,325.69 and some investors might be taking positions in these out-of-the-money index puts to hedge portfolios ahead of the three-day holiday weekend.

ETF Action
Substantial spreads traded in the iShares Emerging Markets Fund (EEM) today. This ETF holds shares of companies form developing countries like China, Russia and Brazil. Shares finished the day up 60 cents to $47.25 and a morning trade included a September 41 - 46 put spread, which traded at $1.39, 50,500X. In this trade, the strategist apparently bought 50,500 of the September 46 puts at $2.21 and sold 50,500 September 41 puts at 82 cents. The position offers its max payout if shares fall to $41 or less by the September expiration, which represents a decline of 13.2 percent. An institutional investor looking to hedge exposure to the emerging markets might have initiated this massive vertical put spread.