Bond Traders Selling the News 08-27-2010

Cusick’s Corner
Today we watched well positioned Bond traders (who were long before the Fed’s Quantitative Easing) take advantage of a “selling the news” opportunity in front of the weekend. We also watched the equity market bounce off some critical support levels, finishing on their highs of the day. This is all encouraging, but next week is chalk filled with data. Housing and Claims data are due out towards the end of the week -- check out our Research Center for details. Next week could be slow in spite of this data, but there’s also the potential for more volatility as well. Have a great weekend and see you Monday.

Stocks finished broadly higher Friday. Stock index futures were in positive territory before the opening bell on Wall Street after a report showed Gross Domestic Product [GDP] increasing by an annual rate of 1.6 percent in the second quarter; which was down from 2.4 percent in the first, but better than the 1.4 percent that economists had predicted. The major averages fell deep in the red in morning trading, however, as cautious trading returned and after Intel slashed its third quarter revenue outlook. The sell-off ended abruptly, as Intel saw a v-shaped recovery off fresh 52-week lows and moved back to positive territory. Reassuring words from Bernanke added fuel to the fire. The head of the Fed said the Federal Reserve stands ready to buy mass amounts of securities should the economy deteriorate further. Major averages were broadly higher midday and the strength continued into the close. The Dow Jones Industrial Average added 165 points. The NASDAQ gained 35.

Bullish Flow
Lincoln National (LNC), a Radner, PA life insurance company, finished up 10.3 percent to $23.73 and options volume surged with about 66,000 calls and 9,300 puts traded on the day. Players flocked to September 23, 24, and 26 calls. October 27s were the most actives with 17,200 contracts traded. Investors were reacting to talk a larger insurance company might make a play for LNC. It’s unsubstantiated, but did seem to trigger a big move in the share price and heavy trading in LNC options Friday.

Bullish flow was also detected in Baker Hughes (BHI), Hecla Mining (HL), and ON Semiconductor (ONNN).

Bearish Flow
The tone of trading was so bullish Friday, that there are very few bearish stories to report. Iron Mountain (IRM), a Boston-based business software company, was one of the few names that did see more put activity than usual. After hitting a new 52-week low in early trading, shares rallied and finished up 33 cents to $20.76. Meanwhile, options volume rose to 4X the average daily. 4,300 puts and only 50 calls traded. April 20 puts were the most actives. 3,800 changed hands and with 63 percent trading at the ask, some put buyers were possibly taking positions on concerns about weakness in the share price over the next two quarters.

Bearish flow also picked up in Itau Unibanco Holding (ITUB), Interpublic Group of Companies (IPG), and Mindspeed (MSPD).

Index Trading
The CBOE Volatility Index (.VIX) saw big swings Friday. VIX opened at 26.50 before rallying to 28.11 after a revenue warning from Intel sent the market skidding in morning action. However, the decline in Intel and the S&P 500 ended abruptly around 10:10am ET. After that, it was all downhill for the volatility Index. It settled the day down 2.92 to 24.45 and near session lows. Meanwhile, trading in VIX options was very slow, with about 100,000 calls and 32,000 puts traded on the volatility Index. Trading might be quiet next week as well. August is a vacation period and next week’s Labor Day holiday is also approaching.

ETF Trading
IShares DJ Real Estate ETF (IYR) was the subject of bearish trading Friday. The fund, which holds shares of Real Estate Investment Trusts [REITs] and real estate companies, finished up 80 cents to $50.98 and one player appears to be looking for a possible drop by the December expiration. This strategist was initiating bearish three-way spreads by selling December 55 calls and buying the December 50 – 43 put spread. A total of 10,000 traded in Friday’s session. This spread is bearish as they are financing the spread with short calls. The risk is from a big move higher, beyond the $55 strike. At that point, they might face assignment and be asked to buy the stock at $55. The loss is equal to IYR price at expiration, plus the cost of the three-way spread, minus the $55 strike price.