Keep Tight Risk and Capital Management 06-04-2010

Cusick’s Corner
The trader in me is throwing my arms up, or at the very minimum not holding a bias. If I am in the market then I am trading, meaning tight risk and capital management. I expect this whippy action to continue into the After Hours. Watch the key levels that I discussed last night (check out the www.xpoundblog.com). If we break support and continue with the negative headlines, watch out for the shorts. See you After Hours.

Stocks are trading broadly lower following a disappointing May jobs report. Stock index futures had already fallen into the red before the jobs data after European markets suffered another round of losses, led by a 2.6 percent drop in France’s CAC 40 Index. Stocks sold off across Europe amid ongoing concerns about the European Debt Crisis after Hungary’s ruling party warned that it faces a debt crisis similar to Greece. The news sent the euro tumbling towards 1.20 against the buck by midday Friday. Focus was also on jobs data after the Labor Department reported that the US economy added 431,000 payrolls in May, which was due largely to temporary and government jobs and was much less than the 500,000 increase that economists had expected. In all, the US economy added a dismal 41,000 private sector jobs last month and the unemployment rate edged down to 9.7 percent from 9.9 percent. The tone of trading turned bearish and the Dow Jones Industrial Average is now down 212 points. The NASDAQ lost 42. In the options market is on the light side and defensive, with 2.6 million calls and 2.5 million puts traded at 11:30ET.

Bullish
Some of the managed care names are seeing relative strength and increasing options action Friday. Aetna (AET) is one of them. Shares are up 43 cents to $30.85 and more than 6,500 calls traded in the name, or double the recent average daily call activity in the name. June 32 calls are the most actives. 2,355 changed hands and, with 91 percent trading at the asking price, it looks like call buyers are dominating the action. June 31 calls are seeing similar action. Overall, the strength in the shares and the focus on June calls seems to reflect a bullish short-term view, as June options expire in two weeks.

Meanwhile, WellPoint (WLP), another managed care company, is seeing action in its June call options as well. Shares are up $1.32 to $55.77 and June 57.5 calls are the most actives. 4,520 traded (72 percent Ask). Another 3,555 June 55 calls and 939 July 57.5 calls also changed hands. There is no specific news to explain the action in AET or WLP, but Healthnet (HNT), United Healthcare (UNH), and Cigna (CI) are seeing some interest on Friday as well. Looks like a sector play.

Bearish
Norfolk Southern (NSC) lost $2.28 to $54.52 and options volume is 4X the average daily, led by apparent buyers of June 55 puts. 5,150 changed hands. The top trades include blocks of 1,691 and 1,369 contracts at the $1.65 asking price. The July 50 and 55 puts saw interest yesterday. The action created almost 2,000 new open interest in puts on the railroad company. It isn’t clear what’s driving the action over the past two days, but implied volatility has risen 11 percent to 39.5 and it appears that some investors are bracing for additional losses in shares of NSC over the next two weeks.

AK Steel (AKS) is down 73 cents to $13.75 amid relative weakness in the sector of Goldman Sachs removes US Steel (X) from its Conviction Buy List. AKS options volume includes a block of 2,300 Jan 14 calls at the $2.28 bid price and 1,841 Jan 15 calls at the $2.05 bid price. Looks like premium sellers liquidating positions and looking for shares to hold around these levels, or below, through the rest of 2010.

Unusual Volume Movers
Tellabs (TLAB) options volume is running 4X the usual, with 20,000 contracts traded and put volume accounting for about 58 percent of the activity.

Goodyear Tire (GT) options activity is running 4.5X the usual, with 14,000 contracts traded and call volume representing 98 percent of the volume.

Xilinx (XLNX) options volume is running 3X the usual, with 10,000 traded and call volume representing 95 percent of the activity.

Medicines Company (MDCO), Atlas Energy (ATLS), and AES also had unusual volume.

Implied Volatility Movers
AOL implied volatility is elevated after a story circulated that the company is negotiating an eventual sale to Microsoft (MSFT). Shares are up 51 cents to $21.51 and options action is picking up, with 5,740 calls and 290 puts traded so far. Implied volatility is running to about 50, which was about 45 the day before.