Opa! Short Gyros, Long Windex 06-15-2011

Cusick's Corner
On the surface the catalyst of this latest pullback is Greece. But the reality is that it's a larger mix of a strong Dollar, weak Euro with potential contraction of economic growth and a bad CPI that are the true catalysts. While I am surprised about the strength of the push to the downside, through 1260 on the Sept S&Ps and over a point pop on the VIX, I should expect this on a Quad Witching Expiration. I am watching into the After Hours to see if the shorts start to nibble on covering, especially going into Expiration Thursday which is that last day to trade European style options, and Friday, the last day to trade American style options. I am also watching some Tech names as the major benchmark, NAZ Composite sliced through the 200-Day Moving Average. For full disclosure, I am currently in a S&P Futures Ratio Spread position. See you After Hours.

Stocks are broadly lower on disappointing economic data and amid ongoing worries about the European Debt Crisis. Data released before the opening bell showed the NY Empire State Index, a gauge of regional manufacturing activity, unexpectedly plunging to -7.8 in June, down from 11.9 the month before. Meanwhile, the Consumer Price Index [CPI] edged up .2 percent last month. Economists were looking for no change in the gauge of inflation at the consumer level. Industrial Production edged up just .1 percent in May, and half as much as expected. Finally, the NAHB Homebuilders Index is down to only 13 in June, its lowest levels since September and well below economist estimates of 16. Overseas, clashes between protestors and police in Greece over austerity measures are raising concerns that the country's debt problems are spiraling out of control. The euro gave up 1.8 percent against the US dollar. Worries about the global economy and dollar strength are weighing on crude, which sank $2.06 to $97.31. Gold lost $1.2 to $1,523.2 an ounce. The Dow Jones Industrial Average is down 173 points and the tech-heavy NASDAQ is off 40.3. The CBOE Volatility Index (.VIX) jumps 2.39 to 20.65. Trading in the options market is active and reflects the bearish underlying sentiment, with 4.6 million calls and 5.7 million puts traded through 1:00pm ET.

Bullish Flow
Yahoo (YHOO) shares are trading down 33 cents to $14.87 and options volume in the Internet search giant includes 111,000 calls and 25,000 puts. The top trades are part of a spread, in which an investor bought 15,000 January 16 calls at $1.21 and sold 15,000 January 20 calls at 33 cents. If opening, the hefty spread, for a net debit of 38 cents, is a bullish play because it has a breakeven at $16.38 at the January expiration, which represents a 10.2 percent rally over the next 6 months. The potential pay-off (excluding transaction costs) is $3.62 if shares rally to $20 or more. YHOO touched a 52-week high of $18.84 on May 9, but has been under pressure since that time.

General Dyamics (GD) sees relative strength and increased call activity after Lazard analysts initiated the stock with a Buy rating and an $86 price target. Shares of the aerospace and defense contractor are up 23 cents to $70.67. 7,950 calls and 680 puts traded in GD so far. Most of the action is concentrated in the January 2013 calls at the 90 line after an investor bought 7,500 at $2 per contract. This investor might be acting on the analyst recommendation and taking a position in 2013 deep out-of-the-money calls in General Dynamics.

Bearish Flow

AT&T (T) is down 1.8 percent to $30.24 and one of thirty Dow stocks under water through midday. In AT&T options action, one investor sold a block of 27,500 June 40 calls at 70 cents. They also bought 27,500 August 26 puts at 15 cents and sold 27,500 August 30 calls at $1.13. In other words, they sold the June 30 calls to buy an August 26 - 30 bearish risk-reversal and are probably rolling a position out two months. A shareholder might be initiating the bearish combos against stock as a hedge or "collar" strategy on the phone company.

Deutsche Bank (DB) is trading down $2.19 to $55.79 and bearish trading is picking up in the German bank. Concerns about the unfolding European Debt Crisis are probably partly to blame. June 55 puts are the most actives. 1,385 traded. 74 percent traded at the ask and open interest is 851 contracts. Some investors appear to be bracing for additional short-term weakness and buy these puts, which are 1.4 percent out-of-the-money and expire at the end of the week. DB July 57.5 puts are apparently being bought-to-open as well.

Unusual Volume
JC Penney (JCP) options volume is running 2.5X the (22-day) average, with 104,000 contracts traded and put volume accounting for about 71 percent of trades.

iShares Japan Fund (EWJ) options volume is 3X the average daily, with 53,000 contracts traded and put volume representing 56 percent of the activity.

AT&T (T) options volume is running 4X the average daily, with 104,000 contracts traded and call volume accounting for 67 percent of the activity.

Increasing options activity is also being seen in Arcelor Mittal (MT), Hartford (HIG), and Cree Research (CREE).

Implied Volatility Mover
CBOE Volatility Index (.VIX) is rallying, as the S&P 500 Index (.SPX) loses 21.27 points to 1,266.60. VIX is now 2.42 points to 20.68 and has rallied 33.9 percent so far in June. Options action is brisk in the VIX trading pit. 376,000 calls and 100,000 puts. Now that the June contract has expired, players have turned their focus to July and August call options on the volatility index. Volume in the July 25 call is approaching 90,000 contracts. July 20, July 21, and August 20 calls on the volatility index are seeing heavy trading as well.