Fed's Time Frame Threshold 11-03-2010

Cusick's Corner
The Fed will continue to support the recovery and markets with the continued infusion of Dollars, UUP. Bonds on the short end really took a hit on the news that the Fed is taking a 5-6 year time frame threshold, which is why the 3-10 yr maturities took the brunt of the price pullback. The reality is that things are not growing as fast as the Fed would like, plus the positive data that has been coming out is slightly discounted, ADP most notably. Overnight, traders are focusing on the UK and ECB because they are coming out with policy tomorrow and there's also the Claims data that is out pre-open. If the EU starts to get aggressive on the monetary side, this could add to the potential for currency wars and if the Claims start to go north towards 500K, this could put some resistance to the upside. See you Midday.

Major averages finished a volatile trading session little changed Wednesday. With no major surprises resulting from Tuesday's mid-term elections, the focus turned to the Federal Reserve and its meeting on interest rates. Stocks were broadly lower in cautious trading at midday and ahead of the announced. Then, at 2:15 ET, volatility picked up a notch after the Fed issued its post policy statement. As was widely expected, officials left rates unchanged and announced plans to buyback $600 billion in Treasury bonds. Trading turned choppy in afternoon action, but at the end of the day, the situation had stabilized. The Dow Jones Industrial Average traded in a 128-point range and finished up 25 points. The NASDAQ added 6.75.

Bullish Flow
A big buyer of Wells Fargo (WFC) calls surfaced in late-day trade Wednesday. Shares hit a morning low of $25.69, but with the help of a late-day rally, finished the day up 54 cents to $26.46. Meanwhile, large blocks of November 29 calls traded at a nickel late in the session. A lot of the activity was the work of one strategist. They bought a total of 17,300 contracts, according to a source on the floor. At the end of the day, 20,845 November 29 call options traded. Since open interest is 9.403, the activity looks like opening call buying, and like some investors expect the rally in WFC to continue over the next two and a half weeks. November options expire in 16 days.

Bullish options action was also seen in AIG, MGM, and Sprint Nextel (S).

Bearish Flow
A noteworthy spread trader surfaced in Lamar Advertising (LAMR) ahead of earnings. Shares of the Baton Rouge, LA marketing company added 8 cents to $34.09 on the session. Meanwhile, options volume rose to 5X the average daily volume for LAMR, with 2,200 puts and 195 calls traded on the day. The focus was on November 34 – 31 put spreads, which traded 1000X. For example, a lot of 347 Nov 31 puts traded at 42 cents while 347 Nov 34 puts traded at $1.42. The action has all the signs of bearish put spreads at $1, which would probably pay-off well if shares fall when the company releases earnings tomorrow morning.

Bearish flow also picked up in Talisman Energy (TLM), LSI Logic (LSI), and Forest Labs (FRX).

Index Trading
The CBOE Volatility Index (.VIX) edged higher Wednesday morning and hit an intra-day high of 22.02 ahead of the Federal Reserve's interest rate announcement. The index chopped around a bit when the news was released, but then imploded in afternoon trading. At the closing bell, VIX was down 2.01 to 19.56. Meanwhile, put volume picked up as the index came under pressure. 254,000 puts and 179,000 calls traded on the volatility index. Some investors bought VIX puts after the Fed rate announcement, perhaps betting that the market's “fear gauge” might drift lower now that the mid-term elections and the Fed meeting have passed. However, key jobs data are due out Friday, which might add to market volatility at the end of the week.

ETF Trading
Traders piled in to the Powershares Bullish Dollar Fund (UUP) Wednesday. Shares, which track the performance of the dollar against a basket of other major currencies, finished down a dime to $22.14 and options volume hit 3X the recent average daily. 146,000 calls and 5,000 puts traded on the exchange-traded fund. The top trade was a block of 34,000 January 24 calls at 9 cents on the International Securities Exchange. This might be a closing trade, as open interest in the January 24 call is already 172,456 contracts and the biggest position in the ETF. November 22, December 23 and January 23 calls also saw brisk trading, however, as some investors turned to the UUP to play the next move in the US dollar.