Spreads Around Earnings 11-10-2010

Cusick's Corner
While a 15 point range in the December E-Mini S&P futures was a nice trading day for scalpers, it was a thorny consolidation for investors. As noted in the past two Corners, there have been few major catalysts to get the market moving in one direction or the other. The market trend is confirmed up, and new buyers surfaced as we reached new day highs. A signal in the S&P cash SPX was 1216, so the bulls continue to control. Strategically, the early morning rolls seemed to be prudent, occurring on the lows, but spread strategies like bull call spreads also seem to be the prudent choice in this low volatility, whippy market. Spreads mitigate risks commonly associated with options – like volatility shifts & premium decay. Spreads might also be a nice way to play events like earnings. For example, if earnings were today and the stock were trading $24.40 and had bullish sentiment, could buy the front month at-the-money call, 24 strike for $1, and sell the out-of-the-money call, 25 strike for $.50. The max profit is a $1 minus the price paid for the spread which is $.50 or $50 per contract. This allows you to participate in the upside to the $25 strike, so the max profit is $50, plus if the stock does not move, you risk $10. We have a ton of education and webinars on these tactics on the site -- it is worth checking out. No data tomorrow, so see you Midday.

Stock market averages moved broadly lower early, but then battled back to finish with modest gains Wednesday. The table was set for morning losses on Wall Street after the euro and European equity markets traded lower on worries about the ongoing debt crisis. The problems in Europe seemed to overshadow the day's domestic news, which included a better-than-expected reading on jobless claims. According to the Labor Department, filings for jobless benefits fell by 24,000 to 325,000 last week. Economists were looking for a smaller decline, of about 10,000. However, although stocks slipped at the open, the morning decline was orderly and trading had stabilized by midday. From there, overall action was uneventful and the major averages chopped around in a narrow range. At the closing bell, the Dow Jones Industrial Average was up 10 points. The tech-heavy NASDAQ added 15.80.

Bullish Flow
WellPoint (WLP) saw relative strength and increasing options activity Wednesday. Shares hit a morning low of $56.90 before finding a floor and beginning a steady grind higher throughout the remainder of the trading day. At the closing bell, shares were up $1.16 to $58.90 and 3.5 percent off session lows. Meanwhile, the top options trade of the day was a buyer of 10,000 November 60 calls at an average price of 42.5 cents per contract midday. The timing seems good, as the contract is now bid at 79 cents. 15,932 traded total. November 55, November 57.5, and December 60 calls were busy as well. No news on the stock, but the company was presenting at a conference Wednesday and possibly said something to motivate the heavy trading in WLP calls.

Bullish options action was also seen in Merck (M), Citi (C), and BJ's Wholesale Club (BJ).

Bearish Flow
Two large blocks of puts traded in Monsanto (MON) late-Wednesday. Shares lost 15 cents to $62.62 and a block of 22,250 January 45 calls traded on the 29-cent bid. Another block of 11,125 December 55 puts traded at the 55-cent asking price. This appears to be a December 55 – January 45 (1X2) put ratio spread. The strategist is selling deep out-of-the-money January puts and possibly willing to take ownership of shares if the chemical company moves to $45 or less by the January expiration. They are also buying half as many of the December 55 calls and by doing so, creating a bearish position that pays off nicely if shares fall through December, but not below the $45 strike through the January expiration. It might also be a position adjustment or a roll – i.e. moving out of January 45 puts to a smaller position in December 55 puts.

Bearish flow also picked up in Potash (POT), Viacom B (VIA/B), and Novellus (NVLS).

Index Trading
Overall options volume was light in the index market Wednesday. 405,000 calls and 491,000 puts traded across the S&P 500 Index (.SPX) and other cash indexes, which is only 80 percent of the recent average daily volume, according to Trade Alert data. Meanwhile, the CBOE Volatility Index (.VIX) hit a morning high of 19.96, but finished down .61 to 18.47 and near session lows. One index that did see a bit more volume than usual is the US Dollar Settled Euro Index. Trading under the symbol XDE, this index tracks the euro/US dollar currency pair and hit a three-week low of 136.74 before rallying late and finishing up .11 to 137.86. The volatility in the euro seems to have motivated some action in XDE options Wednesday, as 1,729 puts and 265 calls traded on the index, or more than double the normal volume for the index.

ETF Trading
The iShares Silver Fund (SLV) saw another day of heavy trading. 589,000 calls and 429,000 puts traded on the fund Tuesday after silver hit a high of $29.34, but gave up the gains to close off 62 cents to $26.81. Today, silver hit a low of $26.58, but battled back to $27.30 (down $1.60). The volatility in the white metal has stirred up a lot of action in the SLV fund, which is an ETF that owns the actual commodity. SLV shares finished up 54 cents to $26.72 and 357,000 contracts traded on the fund, which included 227,000 calls and 129,000 puts. November 26, November 27, November 29, and December 27 calls were the most actives.