Inflation & Deflation Fighters 05-11-2010

Cusick’s Corner
Today’s market action is precarious at best. The Euro is still down, gold at almost all-time highs, and stocks are still running to the upside. As a trader, when the market and policy action are not making much sense, one must really shore up risk and capital management. On the policy front, two very different economies, the US and EU, are deflation fighting. And then there’s China inflation fighting. While we are trying to heat things up with low rates, China is trying to cool things down by raising rates. In the end, I want to see if this bid can continue its impressive strength into the After Hours, potentially squeezing the shorts out.

The major averages battled back from early losses and are sporting modest gains midday Tuesday. The table was set for weakness on Wall Street after European markets and the euro slipped on uncertainty about EU $1 trillion bailout plans. While the news helped motivate substantial gains in global equities Monday, questions remain about how the plans will address the underlying problems now deeply rooted in indebted countries like Greece, Portugal and Spain. Consequently, after rallying 405 points Monday, the Dow Jones Industrial Average followed Europe’s benchmarks lower and was down more than 100 points in morning action. However, buyers had resurfaced by mid-morning and the Dow is now up 50 points midday. The NASDAQ added 21. The CBOE Volatility Index (.VIX) lost 2 points to 26.84. Yet, options flow seems somewhat cautious, with about 3.8 million calls and 4.5 million puts traded at 12:15 ET.

Bullish
Microsoft (MSFT) shares are up 43 cents to $29.37 and a noteworthy trade in the options Tuesday is a bullish risk-reversal, which traded 10,000X in morning action. To be specific, an investor bought 10,000 October 33 calls at 60 cents per contract and sold 10,000 January 22.5 puts at 98 cents. This position resulted in a 38-cent credit and is probably a bullish investor willing to buy the stock if it falls to $22.5 per share before the January expiration. They are also buying the October 33 calls, which will give them the right to buy the stock at $33 through the October expiration.

Hewlett Packard (HPQ) saw a bullish risk-reversal as well. Shares of the computer maker gained 16 cents to $49.26 and the focus was on the January 40 puts and January 60 calls. That is, the investor bought 10,000 of the January 60 calls at $1.48 and sold 10,000 of the January 40 puts at $2.30. They collected 82 cents and are probably willing to buy the stock at $40 per share if it falls below that level by January’s expiration. In other words, if the stock falls to $40 or less, the strategist will be assigned on the 40 puts and will have the stock “put” to them at that price.

Bearish
Cardinal Health (CAH) added 23 cents to $35.19 and options volume is running 20X the recent average daily, with about 17,000 puts and 2,740 calls traded on the pharmaceutical company. The bulk of the action is focused on June 35 put options. More than 14,000 traded and about 62 percent of the volume traded at the asking price, suggesting put buyers were initiating a good portion of the trades. Open interest is 1,352 and so the action also looks like opening trades, possibly bearish traders or hedgers bracing for weakness in CAH during the weeks ahead.

Priceline (PCLN) shares tumbled $28.10 to $221.65 after the company reported quarterly earnings that beat Street estimates for the first quarter, but then issued downside guidance for the second. Shares are down and options volume is 4X the average daily, driven by heavy selling of May calls with strike prices ranging from 220 to 250. About 20,000 calls and 12,000 puts traded total.

Unusual Volume Movers
MBIA (MBI) options volume is running 3X the usual, with 81,000 contracts traded and put activity representing about 73 percent of the activity.

Electronic Arts (ERTS) options activity is running 2X the usual, with 23,000 contracts traded and call volume representing about 58 percent of the volume.

Kinross Gold (KGC) options volume is running 3X the usual, with 21,000 traded and call volume representing 75 percent of the activity.

There is also unusual in Agnico Eagle Mines (AEM), Dean Foods (DF), and US Airways (LCC).

Implied Volatility Movers
Bank of New York (BK) implied volatility is higher after CNBC reported that New York Attorney General Cuomo is going after the bank’s Ivy Asset Management in connection with Bernie Madoff securities. Shares are down 29 cents to $31.28 and 22,000 puts traded in the name, or about 13X normal. Implied volatility is up about 10 percent to 39.