Volatility is on the Move 01-04-2011

Cusick's Corner
Volatility is on the move. The VIX popped 3.5% and the back month futures are also moving higher into the mid 20s. The market is celebrating new highs but the oversold nature of the market is starting to get more attention with a move in volatility. I will be monitoring the close to see if we hold critical levels of 1262 in the S&P, plus looking for any slowing in the selling that has surfaced in the commodity sector. This might be a good time to strategize some potential hedges, i.e. puts, especially if volatility starts to move. See you After Hours.

Stocks are trading lower in cautious market action Tuesday. With no economic data to guide the early trading, stock market averages opened modestly higher following a day of gains across most of Asia and Europe. Japan's Nikkei added 1.7 percent and UK's FTSE is up 1.9 percent. A report on Factory Orders, released at 10:00am ET, came into focus and showed a surprise increase of .7 percent during the month of November. Economists were looking for a drop of .3 percent. The market showed little reaction to the data, however, and attention now turns to the release of Auto and Truck sales numbers and minutes from the December 14 FOMC meeting due out later today. Some attention is on the commodities market as well. Gold is reeling for a loss of $45 to $1378 an ounce. Crude oil sank $3.15 to $88.40 a barrel. The Dow Jones Industrial Average is down 30 points and near session lows. The NASDAQ lost 25. The CBOE Volatility Index (.VIX) gained .55 to 18.16. Trading in the options market is active, with 5.3 million calls and 3.8 million puts traded through 11:30am ET.

Bullish
Disney (DIS) shares notched a new 52-week high and are helping to keep the Dow Jones Industrial Average steady through midday. DIS is up 2 percent to $38.59 and one of 14 Dow stocks in positive territory. Meanwhile, options volume includes 14,000 calls and 3,350 puts. The biggest trade of the day is a block of 2,752 January 38 calls. It traded at 86 cents per contract on the International Securities Exchange [ISE], and is an opening customer buyer, according to ISEE data. 4,160 traded. Another 3,835 January 39 calls changed hands. This looks like short-term speculative call buying in Disney. January 2011 options expire in 17 days.

The biggest equity options trade so far today is in Citi (C). Shares lost 7 cents to $4.83 and one investor bought at block of 181,512 January 2012 $6 calls at 35 cents each. The massive premium purchase was tied to a block of 8.37 million shares at $4.90 and seems to reflect expectations for a move in Citi shares beyond $6 by the January 2012 expiration.

Bearish
Put volume picked up in Murphy Oil (MUR), as shares fell $1.39 to $74.72. Many energy names are under fire today after crude oil lost more than $3. Shares touched a new 52-week high yesterday, up 43.3 percent since August. Meanwhile, in options action, some investors appear to be bracing for additional weakness in the shares of the El Dorado, AR oil and gas refiner. 20,000 puts and 690 calls traded in the name through midday. February and April 70 and 75 puts are the day's most actives.

KBW Bank ETF (KBE) is seeing some interest. Shares are off 30 cents to $26.20 and to blocks (5,000 each) totaling 10,000 January 26 puts traded at 50 cents each on the ISE, where ISEE sentiment data indicate that a customer bought-to-open a new position. If so, it might be a short-term hedge heading into the release of FOMC minutes this afternoon. January 2011 options expire in two and half weeks.

Unusual Volume Movers
Alcoa (AA) options volume is running 3X the usual, with 166,000 contracts traded and call volume accounting for 61 percent of the activity, according to data from website WhatsTrading.com.

PBR options activity is running 3X the usual, with 151,000 contracts traded and call volume representing 60 percent of the volume.

GM options volume is 2.5X the typical levels, with 93,000 contracts traded and call volume accounting for 63 percent of the activity.

Increasing volume is also being seen in BP, MGIC (MTG), and Supervalu (SVU).

Implied Volatility Movers
Supervalu (SVU) implied volatility is moving higher after Morgan Stanley lowered its rating on the stock to UnderWeight from Equal Weight. Shares are down 66 cents to $8.95 through midday. Meanwhile, 14,000 calls and 4,230 puts traded in the name, or 3.5X the recent average daily. Implied volatility is up more than 15 percent to 51.