Trader's Market 09-23-2010

Cusick's Corner
This was an ideal day for traders -- break on the open, push to the upside (a little choppy, keeping everyone nervous) and then a decent pullback towards the lows. (The S&P Dec E-minis had a range of 1117.25-1134.50.) While volatility continues to creep into the market, VIX +6.8%, there are market strategists who are trying to take advantage of some relatively inexpensive insurance, most notably in the Emerging markets (EEM) where there was a big put purchase in Oct. This is a great example of how any strategist can take advantage of some still fairly priced insurance for long holdings, using shorter-term or long-term options when that uncertainty starts to creep back into the market. Watch the Durable Orders data due out at 8:30 ET -- if there is a drop of more than 2%, we could see some early volatility early in the session. See you Midday.

Major averages finished lower following a round of mixed economic news Thursday. European markets and the euro traded lower overseas before the opening bell on Wall Street following disappointing economic data from the euro-zone. In the US, the focus turned to jobs data early-Thursday after the Labor Department reported that weekly claims increased by 12,000 to 465,000 in the period ended September 18. Economists were looking for a decline of 3,000. The day's other economic stats, released at 10:00 ET, were a bit brighter. According to one report, existing home sales increased to an annual rate of 4.13 million in August, up from 3.84 million in July and better than the 4.10 million predicted by economists. Separate data showed the list of leading economic indicators up .3 percent in August, up from .1 percent two months ago and also better than the .1 percent that economists had predicted. Stocks held steady on the mixed economic news through midday, but then a wave of selling pressure surfaced Thursday afternoon. At the end of the day, GE, Disney (DIS), and JP Morgan (JPM) were the Dow's worst performers and the Dow Jones Industrial Average settled down 77 points. The NASDAQ lost 7.5.

Bullish Flow
Bank of America (BAC) saw notable options trades Thursday. In morning action, one investor stepped into the options market and apparently bought a block of 20,288 November 16 calls at 12 cents each. Later, in afternoon trading, shares were down about 25 cents to $13.17, and another (or maybe the same person) bought 35,189 November 16 calls at 12 cents per contract. At the end of the day, more than 108,000 November 16 call options traded on the bank. It was the day's most actively traded equity options contract.

Bullish flow was also detected in Office Depot (ODP), Corinthian Colleges (COCO), and Career Education (CECO).

Bearish Flow
Frontline (FRO), a Bermuda-headquartered shipping company, saw a noteworthy spread trade Thursday. Shares were down $1.10 to $27.69 in volatile trading and one strategist apparently bought the November 27.5 – 24 put spread at $1.20, 2000X. That is, they bought 2,000 November 27.5 puts at $1.90 and sold 2,000 November 24 puts at 70 cents. The spread has a bearish pay-off chart with a max profit of $2.30 if shares fall to $24 or less by the November expiration. The action is noteworthy, as there was no company-specific news to explain the bearish trading and relative weakness in FRO Thursday.

Bearish flow also picked up in Dana Corp. (DANA), Tenaris (TS), and Prologis (PLD).

Index Trading
The CBOE Volatility Index (.VIX) rallied late in the day to finish up 1.37 to 23.87, after the S&P 500 faltered late in the day and finished down 9.45 to 1,124.84 and risk perceptions rose for a second day. As noted in yesterday's closing wrap, sentiment has been cautious over the past two days and that trend has been reflected in strength in VIX, as well as gains in safe havens like gold and bonds. However, overall volume in the index market was very light Thursday and it doesn't seem like investors are aggressively buying puts to protect portfolios. Approximately 289,000 calls and 362,000 puts traded on the S&P 500 Index (SPX), VIX and the other cash indexes, which is only about 60 percent the average daily volume, according to Trade Alert data.

ETF Trading
SPDR Gold Trust (GLD) added a dime to $126.30 after gold gained $1.4 to $1291.90 an ounce Thursday. In the options market, one strategist appears to be bracing for volatility in the metal and apparently bought the December 115 – 100 put spread on the GLD at 80 cents. That is, they bought 10,000 of the December 115 puts at 98 cents and sold 10,000 December 100 puts at 18 cents, which is a bearish spread with a max pay-off if shares fall to $100 or less by the December expiration. GLD is an exchange-traded fund that holds the precious metal. Investors looking for exposure to gold can buy GLD shares or trade GLD options.