Eyes Were On Egypt 02-10-2011

Cusick's Corner
The market bounced on Egyptian President Mubarak's news conference where he vowed to step down in September. The Egypt ETF, EGPT, also bounced but we will have to see what happens if the crowds at Tahrir Square do not orderly dissipate. This news was expected -- Mubarak already announced this news in his statement last week which affirms that this matter was already priced into the market. What is notable today is that the afternoon volume in the major indices (especially in the tech space, NASDAQ) has been breaking the down turn that we have seen over the last 5 sessions. With emotions rising, could have additional fuel tomorrow from the Trade Balance and Michigan Sentiment which comes out at and right after the open. See you Midday.

Stock market averages finished little changed on mixed news day. Economic data was in focus early after the Labor Department reported that weekly jobless claims fell by 36,000 to 383,000 in the week ended February 5. Economists were looking for a decline of about 10,000. Yet, after 8 consecutive days of gains, the Dow Jones Industrial Average struggled at the open following around of uninspiring earnings reports. Cisco Systems (CSCO) was the Dow's biggest loser, falling 14.2 percent, after its earnings outlook was less rosy than analysts expected. Akamai (AKAM), Activision Blizzard (ATVI), and Pepsico (PEP) also fell on profit news. Yet, trading was steady into midday and a modest round of buying interest surfaced late in the session. News that President Mubarak was stepping down seemed to help sentiment somewhat. But, at the end of the day, weakness in Cisco and 15 other Dow stocks sunk the industrial average for an 11-point loss. The tech-heavy NASDAQ added 1.4 points.

Bullish
Colgate Palmolive (CL) saw interesting options action Thursday. Shares of the consumer products giant lost 59 cents to $77.73 and options volume rose to 5X the average daily. 20,000 calls and 12,000 puts traded on the day. The biggest trades include bullish risk-reversals. For example, a block of 5656 May 85 calls at traded at the 49-cent asking price and, at the same time, 4,920 May 70 puts traded on the 59-cent bid. This looks like an opening position. The strategist was selling puts to buy calls, betting that shares will move higher from now through May. In addition, since the strategist is selling May 70 puts, they're making the statement that they are willing buyers of the stock at that price level.
Bullish trading was also seen in Triquent Semiconductor (TQNT), Chesapeake Energy (CHK), and American Eagle (AEO).

Bearish
PMI Group (PMI), a Walnut Creek, CA surety and title insurance company, was the subject of increasing put activity today. Shares finished the day up 8 cents to $3.25 and volume in the February 3 puts reached 10,230. In addition, 65 percent of the put volume traded at the ask-side of the bid-ask spread, according to data from web site Whatstading.com. Implied volatility jumped 17.5 percent to 94. This stock already has a high short interest ratio (42.2 percent of float) and now bearish traders appear to be circling the stock in the options market as well. It might be a play on earnings, expected February 15, before market.
Bearish flow also surfaced in Omnicare (OCR), Ann Taylor (ANN), and Alcoa (AA).

Index Trading
569,000 calls and 459,000 puts traded on S&P 500 Index (.SPX) and other cash indexes Thursday. The CBOE Volatility Index (.VIX) added .22 to 16.09. Fourteen of the fifteen most active index contracts were options on the VIX. The top seven were VIX call options. For example, VIX March 35 calls traded 50,100 contracts and April 27.5 calls traded 41,180X. The heavy trading in deep out-of-the-money calls is often a sign that some investors are concerned about an uptick in market volatility in the months ahead. VIX March 50 calls, which have a strike price 210 percent above the current VIX, even saw some interest today. 20,200 traded.

ETF Action
A noteworthy spread trades in the SPDR 500 Trust (SPY) Thursday afternoon. Shares, which hold the S&P 500 components, battled back from early weakness and finished the day up 5 cents to $132.32. In one options strategy, the investor sold 50,000 March 125 puts at 73 cents. They also bought 25,000 March 128 puts at $1.21 and bought 25,000 March 122 puts at 48 cents. The trade is a butterfly spread, with the 125s serving as the body, and the 122s and 128s bought for the wings. At a 23-cent net debit, it's a bearish play or maybe a hedge. The max-payoff happens if shares fall to $125 through the March expiration, which represents a 5.5 percent market correction over the next 36 days.