Fear on the Rise 06-16-2011

Cusick's Corner
Support held into the close and the After Hours finished in the green. Quad Witching is tomorrow where the options and futures all expire and the European options actually settle in the morning so there could be some maneuvering early based on the settlement. There is a lot of work that needs to be done on the upside if the bulls really do have a chance to make any kind of measured move, keep and eye on the Euro Currency pre-market and early in the opening session, a strong Euro would help the bulls and a break of 1271 on the S&Ps would be a definite plus. Volatility is bouncing, came off a little on the close, making insurance (puts) expensive. Keep an eye on September VIX futures, VXU11 23.35, watch for continued move to the upside on this Fear Index going into the weekend. On last note, the Michigan Sentiment is due out soon after the open; the market will not like a big downside shift in consumer sentiment, especially after the most recent data. See you Midday.

Stock market averages gave up midday gains to finish mixed Thursday. After the Dow's 179-point slide the day before, trading remained cautious and focus turned to the latest weekly jobless claims numbers. According to the Labor Department, filings for benefits declined by 13,000 to 414,000 in the period ended June 11. Economists were looking for a smaller drop, to 420,000. A separate report showed housing starts increasing by 19,000 to 560,000 in May, which was also better than the 547,000 that was expected. However, there was more bad news from the manufacturing sector after the Philadelphia Fed Survey plummeted to -7.7 in June, from 3.9 the month before and significantly worse than the 9.0 reading that was expected. Yet, after losing 673 points month-to-date, the Dow Jones Industrial Average was holding an 80-point gain at midday. From that point forward, the news flow was light and trading turned choppy heading into the Quadruple Witch options expiration. The Dow Jones Industrial Average was able to hold a 65-point gain. However, the tech-heavy NADSAQ erased its advance and finished down 7.8 points.

Bullish
AOL shares gained 62 cents to $20.59 after the company hosted an Analyst Day Thursday. AOL also announced several new product offerings, including a new web information site called AOL Defense. Investors seemed to like the day's company news, as shares moved up and options volume hit 7X the average daily. 5,260 calls and 1,200 puts traded on the Internet service provider. June 21 calls, which are 2 percent out-of-the-money and expiring after tomorrow, were the most actives. 1,355 traded. January 30, July 23, and January 24 calls saw interest as well.

Bullish trading was also seen in Yahoo (YHOO), Medivation (MDVN), and Nabi Pharmaceuticals (NABI).

Bearish
Research In Motion (RIMM) shares touched new 52-week lows today, but closed up 16 cents to $35.33 ahead of its earnings report. Trading in the options market was brisk. 157,000 calls and 159,000 puts changed hands. June 30 puts were the most actives. 32,920 traded, including a buyer of 8,500 contracts at 32 cents each. This put buyer might be rewarded. Shares are trading down 14.3 percent to $30.40 in the after hours after the Blackberry-maker posted quarterly estimates that beat Street estimates, but then dramatically slashed its earnings and revenue outlook. However, while the stock is down, the June 30 puts are still out-of-the-money and could expire worthless if shares hold above $30 through Friday afternoon. So, although shares are reeling, the buyer of June 30 puts might still suffer a loss if shares hold above $30 and the puts are held through the expiration.

Bearish flow also surfaced in Finisar (FNSR), Masco (MAS), and Harbin Electric (HRBN).

Index Trading
Volume and volatility are increasing in the index market heading into tomorrow's expiration. June is one of four quarterly expirations. March, September and December are the others. The quarterly expirations are called the Quadruple Witch because, not only are stock, index and ETF options expiring, but so are futures, single stock futures, and futures options. It's likely to be very busy Friday. Volume has already picking up noticeably throughout the week. Today, for example, 1.3 million calls and 1.2 million puts traded across the S&P 500 Index (.SPX), S&P 100 (.OEX) and other cash indexes Wednesday, which is almost twice the recent average daily volume, according to Trade Alert data. The S&P 500 added 2.22 points to 1,267.64 and the CBOE Volatility Index (.VIX) rallied 1.41 points to 22.73. Such a big move in the VIX on an up day for the S&P 500 is unusual and seems to reflect the anxiety investors now face. The volatility index is also being affected by the expiration, as today was the last day to trade June SPX options and trading was heavy. VIX tracks the expected volatility priced in SPX options.

ETF Action
While VIX jumped today, the iPath S&P 500 VIX Short-term Futures ETF (VXX) saw a second day of high volume. 118,000 calls and 112,000 puts traded on the fund yesterday, including increasing interest in August 18 puts. Shares of the exchange-traded fund, which are designed to track market volatility through VIX futures, added $1.31 to $25.74 today and are now up 12.6 percent on the week. In today's options action, 171,000 calls and 97,000 puts traded in VXX. The soon-to-expire June 25 calls were the most actives. 29,056 traded. Open interest is 30,747 traded and some investors might have been closing out positions, as the contract was out-of-the-money at the open, but in-the-money at the closing bell.