Late Day Short-Covering 06-11-2010

Cusick’s Corner
Today’s report of an unexpected drop in May retail sales was balanced later by an unexpected increase in consumer sentiment. Today’s trading range was relatively tight, volume was light, but all major stock indices closed higher possibly due to some end-of-day short covering. The demand for safe havens picked up today – Gold (GLD) and the Dollar Index (DXY) were both up. For those who are new to futures trading, a reminder that the lead stock index futures had a rollover from June to September. This means that September is now the lead trading (and tracking) month for all U.S. stock index futures (for example: ESU10). Don’t forget that Expiration is next week for June options. It’s been a choppy week – review your positions and exit strategies this weekend. See you Monday.

Stocks battled back from disappointing retail sales numbers and thanks to a rally in the final hour, the major averages finished with gains Friday. Retail sales numbers released one hour before the opening bell on Wall Street showed total sales falling 1.2 percent in May, which was significantly worse than the .1 percent increase that economists had expected. After a 274-point rally Thursday, the Dow Jones Industrial Average opened lower on the news. However, with help from a better-than-expected reading from the University of Michigan Sentiment Index (75.5 for June vs. 74.5 consensus), trading had turned mixed midday. From there, the action slowed until the final hour. Then, a late day buying spree, fueled by short covering, sent the stock market averages into positive territory into the close. The Dow Jones Industrial Average finished up 38.5 points. The NASDAQ added 24.9.

Bullish Flow
Marvell Technology (MRVL) shares added 43 cents to $17.88 and call options on the Bermudian chipmaker saw a noticeable increase in activity. 24,000 contracts traded on the session, which is more than double the typical volume and about 4X the number of puts traded. June 18 calls were the most actives. Of the 12,500 contracts traded, 89 percent hit at the asking price. Another 6,100 July 18 call options traded, with 85 percent on the asking price. There was no news to explain the action, but since the June options come off the board at the end of next week, the activity seemed to include some speculative call buying in anticipation of a rally in MRVL in the days ahead.

Bullish order flow was also seen in Game Stop (GME), Louisiana Pacific (LPX), and Nektar Therapeutics (NKTR).

Bearish Flow
CVS Caremark (CVS), which has become embroiled in a battle with Walgreens (WAG) over their prescription benefit management arrangement, finished up 18 cents to $32.08; but lost 5 percent on the week. In the options market, the tone of trading remained cautious Friday after 26,000 puts and 11,000 calls traded on CVS. July 27 puts were the day’s most actives. Of the 20,850 contracts traded, 71 percent traded at the asking price. Implied volatility rose 2.5 percent to 47, as some investors appeared to be buying puts and bracing for a possible move towards $27 in the weeks ahead.

Bearish flow also picked up in Philip Morris (PM), EZ Chip Semiconductor (EZCH), and Nokia (NOK).

Index Trading
Friday was a light volume day in the index market, with approximately 565,000 puts and 470,000 calls traded across the S&P 500 Index (.SPX) and other cash indexes. The volume represents only about 70 percent the recent average daily volume. The low volume is one reason why the CBOE Volatility Index (.VIX) fell 1.78 to 28.79. VIX tracks the expected or implied volatility of S&P 500 Index options and tends to rise when SPX puts are in high demand. There wasn’t much interest in index puts Friday, however, and VIX fell. Yet, there might be a limit to the downside in the volatility index in the short-term because actual volatility remains high. The 20-day statistical or actual volatility of the S&P 500 is now 30.6 percent. Unless actual volatility eases, it is unlikely VIX will make a significant move below 30.

ETF Trading
Some of the top options trades on a slow day of market action Friday were in the S&P Depositary Receipts (SPY), or “Spyders”. Shares of the exchange-traded fund bounced back from early losses and finished the day up 53 cents to $109.68. In the options, some of the focus turned to the August 112 – 115 call spread, which traded at $1.30, 25,470X on the International Securities Exchange. It appears that this strategist bought 25,470 August 112 calls at $3.19 and sold 25,470 August 115 calls at $1.89, which creates a bullish position with a maximum profit if SPY rallies to $115 or beyond by the August expiration. The spread traded more than 43,000X on the day.