Complacency is the Enemy 05-12-2010

Cusick’s Corner
The market performed well into the afternoon with the Financials, XLF +.15, leading the move to the upside. With the overall market volatility pulling off, one may start to become a little too complacent -- try not to fall into that trap. Keep your risk and capital management close to your vest. Watch two key reports tomorrow -- Continuing and Initial Claims due out at 8:30am ET. optionsXpress has two educational events in Virginia this week – one on Thursday night in Virginia Beach and a one-day workshop in Arlington on Saturday. Check out our Educate tab > Events for the details. See you Midday.

Stock market averages finished with solid gains on a relatively slow news day. With quiet trading overseas, US investors turned some of their attention to economic news early after the Commerce Department reported that the nation’s trade balance increased to $40.4 billion in March, from $39.4 billion the month before. Economists were looking for an increase to $40.5 billion and stock index futures ticked higher on the in-line data. Beyond that, there wasn’t much news to guide the market one way or the other. IBM rose 4.6 percent and led the Dow Jones Industrial Average to a 149-point gain. The NASDAQ added nearly 50. The CBOE Volatility Index (.VIX) lost 2.8 to 25.52.

Bullish Flow
Lowe’s Companies (LOW) shares lost 4 cents to $27.06 and options volume picked up in the home improvement retailer Wednesday. 23,000 calls and 4,160 puts traded. A good percentage of the volume was due to one spread trade, where the strategist apparently sold 7,000 May 25 calls at $2.18 to buy 10,000 June 28 calls at an average of 71.5 cents. This is possibly a position adjustment, or a rolling of in-the-money May 25 calls out and up, to the out-of-the-money June 28 call options. The action looks like a bullish play and is noteworthy, as it comes ahead of earnings on May 17.

Kroger (KR), Gigamedia (GIGM), and Intuit (INTU) also had bullish order flow.

Bearish Flow
Halliburton (HAL) shares added 75 cents to $29.09 and an interesting trade surfaced in the July puts Wednesday, with one investor creating a bearish 1X2 in the 28 and 25 strikes. They bought 2000 July 28 puts at $1.80 and sold 4000 July 25 puts at 96 cents. This spread traded for a credit of 12 cents, which is a bearish play because it makes its best profits if shares of the oil driller settle at $25 at the July options expiration. The bearish play might be in reaction to ongoing anxiety about the impact of the recent oil spill in the Gulf of Mexico. On Wednesday, executives from BP, Halliburton, and Transocean (RIG) were again fielding tough questions in Washington about their responsibility in the disaster.

Bearish flow also picked up in Mohawk (MHK), SAP, and Integrated Device Tech (IDTI).

Index Trading
The CBOE Volatility Index (.VIX) lost another 2.80 to 25.52 and has now lost 37.7 percent since its Friday close of 40.95. In the options market, trading remains active, as index traders jockey for position for the next move in the VIX. Among the noteworthy trades Wednesday -- a buyer of 10,000 June 22.5 puts at an average of 57.5 cents. Another player paid $1.45 for May 25 puts – 35 call “risk – reversals”, 13000X (they bought puts, sold calls.) However, one strategist appears to be bracing for a rally in the volatility index in the weeks ahead. They bought the July 30 – 40 (1x2) call ratio spread at 80 cents, 10000X in morning trading.

ETF Trading
SPDR Gold Fund (GLD) saw another day of heavy trading. 243,000 calls and 132,000 puts traded in the exchange-traded fund Tuesday. Wednesday, shares rose another 74 cents to $121.40 and touched a 52-week high after gold rose fresh new records above $1240 an ounce. In the options market, another 373,000 calls and 165,000 puts traded on the fund. At the same time, while calls outpaced puts by a margin of more than two-to-one, the top trade was a buyer of 40,000 June 115 puts at $1.15 each. The premium purchase, which totals $4.6 million, appears to be an opening position because existing open interest is only 6,091. If so, it’s likely a hedge or maybe a straight bearish bet, as these puts are $6.40 out-of-the-money.