Expect Volatility if Home Sales on Low End 08-23-2010

Cusick’s Corner
The market pulled back into the After Hours on no news or specific economic catalyst. Existing home sales come out tomorrow -- expectations are in a wide range from 3.9 to 5.3 million units (Bloomberg). While the market looks ready to accept the potential for sub-4 million in a couple of months, if it comes in that low tomorrow, we might get some potential volatility in this summertime market. Continue to monitor this current M&A market, some companies may be hungry to consolidate and pick up cash heavy, small competitors for long-term growth reasons or just a knee jerk reaction because there may be no better course for investing their capital. See you Midday.

The major averages slumped in afternoon trading and finished lower Monday. With no economic data and few stock stories to guide the action, M&A activity was in focus early after H-P made a bid for data storage maker 3PAR and HSBC (HBC) announced plans to buy Nedbank Group, a unit of Old Mutual. BofA (BAC) moved higher early, but finished flat, after Fitch ratings upgraded the bank’s preferred-stock rating to investment grade. BAC was one of two Dow stocks to finish unchanged. Fourteen moved higher, fourteen fell, and, after a modest wave of selling pressure in the second half of trading, the industrial average finished down 40 points on the session. The tech-heavy NASDAQ lost 20.

Bullish Flow
Boeing (BA) shares lost $1.30 to $63.30 and an interesting trade in the name Monday was an October 60 put – 70 call risk-reversal, at 88 cents, traded 7000X on the Philadelphia Stock Exchange [PHLX]. That is, the investor apparently sold 7,000 October 60 puts at $1.83 to finance the purchase of 7,000 October 70 calls at 95 cents each. The position appears to be a new one because volume exceeds open interest in both contracts. It’s also a bullish play because the position makes its best profits if the stock moves higher. If it falls, calls will lose value, the puts (which are short) will begin increasing in value. However, this strategist might be willing to buy the stock at $60 and, for the time being, is selling the $60 strike put instead of buying the shares outright.

Bullish flow was also detected in Red Hat (RHT), Focus Media (FMCN), and Wellcare Health Plans (WCG).

Bearish Flow
Isilon Systems (ISLN), a maker of storage devices, finished up $2.13 to $19.96 after HP made a bid for 3Par, which is another name in the same industry as ISLN. Shares of Isilon Systems rallied on the buyout news and options volume hit 12X the usual. The top trades of the day were actually part of a bearish strategy, however, after one strategist apparently paid $1.55 for the December 12.5 – 17.5 put spread, 3000X. That is, they bought 3,000 December 17.5 puts at $1.80 and sold 3,000 December 12.5 puts at 25 cents, which is a bearish spread with a max pay-off if shares fall to $12.5 or less by the December expiration.

Bearish flow also picked up in Mindspeed (MSPD), Dollar Thrifty (DTG), and Air Methods (AIRM).

Index Trading
The CBOE Volatility Index (.VIX) edged up .17 to 25.66 after the S&P 500 (.SPX) faltered late in the day and finished down 4.33 points to 1,067.36. Trading in VIX options was on the light side, with about 89,000 calls and 92,000 puts traded on the day, or about 82 percent the recent average daily. The top trades surfaced midday when a strategist sold the September 27.5 – 30 call spread at $1 even, 18000X. They sold the lower strike and bought the higher strike, perhaps betting that the volatility index (futures) will remain below 27.5 through the September expiration.

ETF Trading
A couple of large put spreads traded in the iShares Emerging Markets Fund (EEM) Monday. The fund finished down 37 cents to $40.65 and Monday’s trades included a September 36 – October 39 put spread, apparently bought at 94 cents, 13000X. This spread might roll (close September to open October) a position an extra month and up a few strikes. Meanwhile, another strategist initiated a September 40 – 37 put spread, 10000X. It looks like they paid 52 cents to buy the 40s and sell the 37s. In both spreads, these strategists appear to be setting up bearish plays on the emerging markets fund. It might be an institutional investor looking for a hedge should the recent increase in global equity market volatility continue in the weeks ahead.