Market's Bringing Ugly Back 08-05-2011

Cusick's Corner
Stock volumes are surging. The market's bringing ugly back. Selling was brisk earlier but a rebound was in play after the European Central Bank said it would provide support for Italian and Spanish bonds if they agree to certain economic reforms. The market has had its swings today along with the Volatility Index, VIX, which hit 52 week highs of 39.25 earlier in the session but has now given up much of those gains (see Implied Volatility Mover). Don't put away that whiplash brace just yet. See you After Hours.

Trading remains very volatile, but stock market averages are well off session lows midday Friday. The table was set for a rally at the opening bell after the Labor Department said the US economy added 117,000 jobs in July. Economists were looking for an increase of about 84,000. Meanwhile, the unemployment rate eased to 9.1 percent from 9.2 percent and .1 percent better-than-expected. Average hourly earnings rose .4 percent and twice as much as forecast. Yet, while the Dow Jones Industrial Average rallied more than 171 points on the data, the gains were quickly erased and by mid-morning, the Dow was down more than 240 points. Then, the industrial average reversed direction once again and is now up 25 points. The average has traded in an impressive 415-point range. The NASDAQ is down 12. CBOE Volatility Index (.VIX) added another 1.61 to 33.27. Trading in the options market is extreme today, with 8.3 million calls and 11.6 million puts traded through 12:45pm ET.

Bullish Flow
Symantec (SYMC) is trading up 17 cents to $17.29 after FBR Capital analysts upgraded the stock to OutPerform from Market Perform. Shares are holding modest gains and trying to snap a six-day 14.3 percent losing streak. Meanwhile, in options action, one player took a position in 17,650 January 2013 $20 calls on the security software maker. $2 was paid per contract and this trade breaks even if shares are at $22 at the 2013 expiration, which represents a 27.2 percent rally from current levels. 19,229 of these long-dated calls have traded against 6,568 in open interest.

A longer-term bullish spread trades in OpenTable (OPEN) today as well. Shares, which have been pummeled for a loss of 34 percent during the past month, are up $2.09 to $63.37 today. Meanwhile, a 2500-contract block of January 2013 $55 puts traded in OPEN at $11 while the January 2013 65 - 90 call spread traded at $9.35, 2500X. In this spread, it looks like $55 puts were sold to buy the 65 - 90 call spread, for a net credit of $1.65 for the three-way. The strategist is possibly a willing buyer of the stock at $55 (strike price of the short put), but wants exposure to the upside and is buying a longer-term call spread as well.

Bearish Flow
Microsoft (MSFT) has battled back from morning weakness and is now up 3 cents to $25.97. The top options trade on the software maker surfaced early in the session when a strategist apparently sold 15,000 October 30 calls on Microsoft at 16 cents to buy 10,000 October 20 puts at 20 cents. This bearish ratio (2X3) risk-reversal traded on the ISE, where data indicate a new position was opened. If so, it's a bearish play that pays off well if shares fall below $20 through the October expiration. A large shareholder might have initiated the trade to hedge or "collar" shares.

Rambus (RMBS) shares are falling to new 52-week lows today and were recently down 59 cents to $11.64. Options order flow is noteworthy, as 15,000 puts and 3,980 calls have traded in Rambus through midday. Typical volume is about 3,900 contracts (puts and calls). The action has been in smaller lots. The biggest trade so far is 167 January 15 puts at $4.95 when the market was $4.75 to $4.95. Looks like a buyer and is possibly a closing trade. After a two-week 25 percent plunge in shares, the Jan 15 put is now 22.2 percent in-the-money. 4,363 contracts traded against 6,043 in open interest. RMBS Jan 10 and 12.5 puts are actively traded to today as well.

Unusual Volume
PowerShares QQQ (QQQ) options volume is running 2X the (22-day) average, with 1.2 million contracts traded and put activity accounting for 68 percent of the volume.

SPDR Financials (XLF) options volume is 2X the average daily, with 600,000 contracts traded and put volume representing 68 percent of the activity.

SPDR Energy ETF (XLE) options volume is running 2.5X the average daily, with 211,000 contracts traded and put volume representing 72 percent of the total volume.

Increasing options activity is also being seen in is Wells Fargo (WFC), EMC, and Valeant Pharmaceuticals (VRX).

Implied Volatility Mover
CBOE Volatility Index (.VIX) surged today and hit a morning high of 39.25. The market's "fear gauge" has not approached the 40 level since May of 2010. VIX dipped below 28 early, but then rallied to 14 month highs mid-morning after the Dow Jones Industrial Average tumbled and added to yesterday's 512-point loss. However, VIX is now up 1.34 to 33 and well off session highs after the Dow and S&P have moved back to positive territory. Still, the volatility index is up almost 90 percent during the past two weeks, as fears about the European Debt Crisis, the global economy and earnings have taken a heavy toll on investor sentiment.