Monitoring Put/Call Ratio 05-24-2010

Cusick’s Corner
What a weekend -- the Hawks are going to the Stanley Cup (huge hockey fan, but I guess I have to be with 4 kids in travel hockey), had our first 90 degree day in Chicago and during the last 20 minutes of trading on Friday, the SPX decided to pop almost 20 points. This market continues to struggle with the EU, China (EEM) and Commodities (DBC), so there’s continued pressure to the downside as well. After reviewing the markets over the weekend, basically determined that if you are in these markets, you are going to have to trade these markets. Right now the VIX is over 35 and as I noted Friday, the Put/Call ratio is at 10 year highs. This market looks ripe to potentially challenge the upside. Remember, that this is short-term and needs to be addressed accordingly. Keep a close eye on the two sectors that I mentioned above, if these deteriorate any further, then that upside challenge could be thwarted quickly. See you After Hours.

Trading is orderly and market action is mixed midday Monday. The table was set for early weakness on Wall Street after European markets and the euro suffered another round of losses amid ongoing concerns about Europe’s debt crisis. However, the early decline on Wall Street was short-lived and, with the help from better-than-expected housing data and strength in the tech sector, market action turned mixed. The housing report, released at 10:00 ET, showed existing homes sales up to an annual rate of 5.77 million in April, from 5.36 million in March and better than the 5.65 million that economists had predicted. The euro has also come of its lows and is back near 1.24 against the buck. On Wall Street, the action turned mixed, with Dow down 30 points, but the NASDAQ up 11. The CBOE Volatility Index (.VIX) lost 4.08 to 36.02. Trading in the options market is much slower than in recent days, with about 3.9 million calls and 3.4 million puts traded at 12:30 ET.

Bullish
Dutch semiconductor equipment maker Asmel (ASML) is seeing more volume than usual. Shares are down 34 cents to $28.56 and total options activity is running 8X the recent average daily. About 12,000 call options and only 92 puts have traded so far. A lot of the action is in the June 27.5 – 30 call spread. Both contracts have traded more than 6,000X and some investors appear to be buying-to-open new positions. That is, in morning trading, the 27.5 calls were being bought at $2.09 and the 30 calls sold at 72 cents, which creates a bullish risk graph with a max pay-off if shares rally to $30 or more by next month’s options expiration.

Interest in the Select Sector Technology Fund (XLK) continues. XLK is the exchange-traded fund that holds all of the information technology companies from the S&P 500. It added 14 cents to $21.61 Monday morning and the June 23 – 24 call spread has traded more than 15,000X. Open interest in the June 24 calls is more than 119,000 after several days of heavy trading last week. However, the fund hasn’t performed well and now some investors might be closing out positions in the 24 strike to open positions in the more realistic 23 strike.

Bearish
Select Sector Industrial Fund (XLI) puts are busy for a second day. Recall that the June 30 – 28 put spread saw interest Friday (see 4/21 Bear Tracks at xpoundblog.com). Today, shares are down a dime to $29.32 and some investors are showing interest in the September 28 – 23 puts spread. For example, it traded at $1.25, 4000X in morning action. This spread has a potential $3.75 pay-off (excluding commissions) if shares of the fund, which holds all of the industrial names in the S&P 500, fall to $23 or less by the September expiration.

Mead Johnson Nutrition Companies (MJN) is down 46 cents to $48.63 and options volume is 2X the average daily, led by a buyer of July 45 – 55 bearish risk-reversals at 55 cents, 4000X in morning action. That is, an investor bought 4,000 July 45 puts at $1.55 and sold 4,000 July 55 calls at $1 each. This position was tied to 208,000 shares at $49.23 and therefore probably more of a volatility play, rather than a straight bearish bet.

Unusual Volume Movers
Etrade Financial (ETFC) options volume is running 6X the usual, with 95,000 contracts traded and put activity representing about 63 percent of the activity.

Legg Mason (LM) options activity is running 5X the usual, with 21,000 contracts traded and call volume representing about half of the volume.

Radian (RDN) options volume is running 3X the usual, with 15,000 traded and put volume representing 95 percent of the activity.

Comcast (CMCSK), American Axle (AXL), and Cardtronics (CATM) also had unusual volume.

Implied Volatility Movers
Citigroup (C) implied volatility is easing after reaching multi-month highs last week. Shares are up 14 cents to $3.90 and have now added 7.4 percent since Thursday. Premium selling is being seen. For example, one strategist apparently sold 30,000 December 4 straddles (puts and calls) – which are the biggest options trades in the marketplace so far Monday. Meanwhile, implied volatility has fallen nearly 10 percent to 57, down from about 70 last Thursday.