Euro Below 1.20 06-09-2010

Cusick’s Corner
Bernanke said today on Capitol Hill that Europe’s debt trouble would have a modest impact on the U.S. His remarks did not help the major markets stay up through the afternoon and the sellers took over. This morning’s gains faded in the afternoon as the Euro fell below the psychological level of 1.20. Once again, the market is near key support 1050 on SPX. If the market challenges this key support, this could be a potential signal of further challenges to the downside. The VIX bounced back to nearly unchanged and had quite a lot of movement – a 4 point range today (see Index Trading). See you Midday.

Stocks market averages gave up early gains and finished lower Wednesday. The Dow Jones Industrial Average opened higher and added to Tuesday’s 123-point gain after the euro and European benchmarks moved to the upside. A rally in crude oil and upbeat comments from Fed Chairman Ben Bernanke added fuel to the rally on Wall Street. The Dow was up triple digits midday. However, BP shares plummeted on bankruptcy fears and a falling euro, back below 1.20 against the dollar, weighed on sentiment in afternoon trading. The Fed’s Beige Book, which offers a qualitative look at economic conditions, offered no relief. Instead, Fed officials said economic growth is improving, but not enough to help the employment outlook. At the end of the day, there wasn’t much to cheer about. The Dow didn’t hold gains and, instead, finished down 41 points. The NASDAQ lost 11.7.

Bullish Flow
Large blocks of call options traded on JP Morgan (JPM) Wednesday. Shares of the banking giant were caught in the late session downdraft and finished the day down 66 cents to $37.12. In options action, a large three-legged trade was initiated after an investor sold 25,000 June 60 calls at a penny each, sold 25,000 January 70 calls at an average of 2.5 cents per contract, and bought 50,000 July 41 calls at 72 cents apiece. The action looks like a position adjustment, as this investor sold-to-close the June and January calls, which are now deep out-of-the-money, and bought a fresh bullish position in 50,000 July 41 calls.

Anadarko Pete (APC), Las Vegas Sands (LVS), and Avis Budget (CAR) also had bullish order flow.

Bearish Flow
TIVO was the subject of a “reverse collar” trade Wednesday. Shares lost 48 cents to $7.22 and hit new 52-week lows. In the options, one player bought 4,000 January 2012 calls at the 12.5 line and sold 4,000 January 2012 puts at the 5 line. They paid 33 cents for this “risk-reversal”. It was also tied to 400,000 shares (short) and therefore a bearish play on TIVO through 2012. Like the collar, the reverse collar offers its max profits if shares fall to the short strike or, in this case, $5 by 2012. It is a hedged bet because the calls offer protection to the upside. It also has the same risk graph as a straight bearish put spread (buy a put and sell a put at a lower strike price).

Bearish flow also picked up in Domino’s Pizza (DPZ), Ambac Financial (ABK), and Autodesk (ADSK).

Index Trading
The CBOE Volatility Index (.VIX) hit a morning low of 30.23 as stocks rallied early Wednesday. However, VIX finished the day up .03 to 33.73. One strategist seems to be looking for additional gains in the short-term and bought the June 32.5 – 35 call spread at $1.05, 10000X, in afternoon action. The spread offers a maximum pay-off of $1.45 if VIX (futures) move to 35 by next week’s expiration. For VIX options the expiration is Wednesday and therefore there are only four trading days left for this position to reach its max potential. About 133,000 VIX calls and 138,000 VIX puts traded on the session.

ETF Trading
Select Sector Consumer Staples Fund (XLP), which is an exchange-traded fund that holds companies like Coca Cola (KO), Procter & Gamble (PG), and Clorox (CLX), gave up early gains and finished the day down 5 cents to $26.24. Meanwhile, options volume rose to 8X the recent average daily, with most of the action focused on the September 26 – 23 put spread. One player paid 77 cents for the spread on 18,800 contracts. By the end of the day, the spread had traded more than 25,000X. This bearish play has a max pay-off if shares fall to $23 by the September expiration. If a 77-cent debit is paid, the pay-off potential (excluding commissions) is $2.23 (difference in strike prices minus debit).