Flight for Safety Trade of Day 08-24-2010

Cusick’s Corner
Flight for safety was the trade of the day in spite of the fact that the indices finished at their worst levels. This was the only glimmer of light for the bulls, the fact that the downside did not exhibit more follow through after a terrible morning and midday. Bonds were the big winners today -- the price of the 30 yr closed at 135-26 +1.22 and yields continued tanking 3.67%. Utilities, XLU, were also a defensive play beneficiary due to continued domestic and global economic fears. While volatility is popping and current sentiment is bearish, consider bear call spreads, (buy out-of-the-money calls and sell at-the-money calls), a strategy to take advantage of this bearish sentiment and rising volatility. Watch the Durable Goods data due out at 8:00am ET; this may present a better view of consumer demand. See you Midday.

The major averages finished with losses Tuesday following a round of selling in overseas markets and disappointing housing data. Concerns about export growth weighed on Japanese equity markets and the Nikkei lost 1.3 percent after the Yen rose to 15-year highs against the dollar. Europe was under pressure after fears about the sovereign debt crisis resurfaced and Ireland’s overall index tumbled nearly 6 percent. Weakness overseas set a bearish tone for morning trading and then the industrial average dipped below 10,000 in morning action after data showed existing home sales plunging a worse-than-expected 27 percent in July. The Dow staged a modest midday rebound attempt, but then faltered again in late-day action to close down 134 points to 10,040. The NASDAQ lost 36.

Bullish Flow
Transocean (RIG) bucked the bearish trend Tuesday. Shares of the oil driller added $1.53 to $52.40 on unconfirmed talk that the oil drilling ban in the Gulf, due to be lifted in November, might be removed early. Shares of Transocean moved up and 23,000 calls traded on the day, which is nearly double the number of puts. September 52.5, 55 and 57.5 calls were the most actives, as some players bought premium on hopes for some sort of an announcement before the expiration, which is 24 days away.

Bullish flow was also detected in Marvell Technology (MRVL), 3Par (PAR), and Focus Media (FMCN).

Bearish Flow
OfficeMax (OMX) lost 34 cents to $10.34 and options volume hit 7X the average daily, driven by September 9 and 11 puts. The spread traded at 75 cents, 2250X in midday trading. It appears that the strategist sold 2,250 of the September 11 puts and bought 2,250 September 9 puts. Looking at the open interest data, this looks like a roll down in strike prices. If so, the strategist is likely exiting a position in the September 11 puts opened earlier this month when the stock was around $12.00 (volume spike on 8/18). Shares have since fallen 13.8 percent and the puts are now 66 cents in-the-money. This strategist is probably banking the profit and now opening a similar bearish position (or hedge) in the September 9 puts.

Bearish flow also picked up in Saks (SKS), Cadence Design (CDNS), and Checkpoint Software (CHKP).

Index Trading
The CBOE Volatility Index (.VIX) hit a high of 28.77 early and finished up 1.80 to 27.46 amid increasing activity in the index market. About 483,000 calls and 462,000 puts traded across the VIX and the other cash indexes. One of the biggest trades was a buyer of 10,000 September 47.5 calls at 35 cents per contracts. This call buyer is probably an institutional player looking for a hedge given the recent uptick in market volatility. However, it would take a major market fall for VIX to spike enough for these calls to finish in-the-money at expiration. VIX has only traded above 47.5 one time so far in 2010.

ETF Trading
Put volume surged in the SPDR 500 Trust (SPY) Tuesday. SPY is an exchange-traded fund that holds the five hundred S&P 500 stocks. Therefore, it is a popular vehicle for hedgers when the stock market becomes volatile. Tuesday was an example, as 1.52 million SPY puts traded on the day. Shares finished down $1.59 to $105.53 and the at-the-money September 105 puts were the most actives. 125,490 changed hands. Another 106,957 September 104 puts traded as well. Meanwhile, the increased action pushed implied volatility in the ETF up 8.5 percent to 26.