Libya Dominating Headlines 02-22-2011

Cusick's Corner
The headline risk just became a reality for now. With the Middle East, most notably Libya, dominating the headlines and continued local unrest at the state level, Wisconsin proposing to drop the public union's collective bargaining rights and now potentially Ohio, the market has come under the most notable pressure in over a month. While these events are serious, we will have to wait and see if they have the true potential to turn this market and this will not be a 1 or 2 day event and then trend resumes. Technically, I would be watching the lower channel of this uptrend, 1305 on the S&P futures. This move does feel more like traders covering rather than fear ramped in the market, VIX still below 20, but there is a change in that the bid is not picking up into the Midday. If the shorts do start to pressure any uptick from here, this could be the first meaningful stance to this run up and warrants traders and investors to keep an eye on this action. See you After Hours.

Market action is volatile Tuesday morning. Stocks opened broadly lower after the three-day Presidents' Day break after unrest in Libya, the world's 18th largest oil producer, triggered a sharp spike in crude prices. Crude oil is up more than $5 and rallying beyond $95 a barrel on supply fears. Meanwhile, Walmart (WMT) is one of the biggest losers in the Dow Jones Industrial Average after the retailer reported earnings that topped Street views, but revenues fell short of expectations. JP Morgan (JPM) and BofA (BAC) are also among the Dow biggest percentage decliners. Meanwhile, the economic news was mixed. Data released early showed the Cash-Shiller 20-City Index of home prices falling 2.4 percent in December. A separate report released later showed the Conference Board's Consumer Confidence Index up to 70.4 in February, from only 64.8 the month before. Yet, the spike in crude oil and weakness in overseas markets seemed to overshadow the day's domestic news. Twenty-seven of the Dow 30 are under water midday and the industrial average is off 115 points. The tech-heavy NASDAQ lost 52.5. The CBOE Volatility Index (.VIX) rallied 3.46 points to 19.89. Trading in the options market is brisk and a bit more defensive than the action seen last week. 5.7 million calls and 5.4 million puts traded through 12:10pm ET.

Bullish Flow
Airlines are weak today after crude oil prices spiked and investors sold shares of the major airlines on concerns about the impact of rising jet fuel costs. Delta (DAL), for example, is down 87 cents to $10.63. Yet, options order flow is interesting, as 28,000 calls and 7,680 puts traded on the airliner through midday. The top trades are blocks of 1,500 March 11 calls at 46 cents and 1,500 March 12 calls at 17 cents. One investor paid a net premium of 63 cents for both contracts, according to a source on the exchange floor. June 13 and September 12 calls are seeing brisk trading also. Some investors might view today's weakness as an opportunity for bullish trades and are buying calls in DAL.

Clean Energy Fuels (CLNE) is seeing relative strength on news UPS has contracted the company for a new fleet of 48 liquefied natural gas (LNG) delivery trucks. Shares are rallying $1.34 to $13.30 and today's options volume is 6,060 calls and 810 puts. March 13 calls are the most actives. 2,650 traded and, with 86 percent of the volume trading at the asking price, it appears that call buyers are dominating the action and looking for additional gains in CLNE in the weeks ahead. March options expire in 24 days.

Bearish Flow
Ford Motor (F) options are actively traded Tuesday morning. Shares are down 66 cents to $15.11 and options volume includes 114,000 calls and 80,000 puts. March 15 puts, which are now 11 cents out-of-the-money, are the most actives. More than 38,000 and, with about 75 percent trading at the ask, it looks like buyers are dominating the action. March 16 puts, March 15 calls and March 16 calls are busy as well. Implied volatility is up 13 percent to 34. The heightened activity might be a play on auto and truck sales numbers, due one week from today.

A large put spread trades in the iShares Emerging Markets Fun d (EEM). Shares are down $1.47 to $44.84 following a day of volatility in global financial markets. Meanwhile, the big options trade of the day was a buyer of 30,200 May 43 – 38 put spreads at 93 cents each. In this spread, the 43s were bought at $1.41 and the 38s sold at 48 cents. An institutional investor might have initiated the trade a hedge. The max profits happen if shares fall to $38 or more by the May expiration.

Unusual Volume
Proshares UltraShort S&P 500 (SDS) options volume is running 2.5X the (22-day) average, with 89,000 contracts traded and call volume accounting for 85 percent of the volume.

Hewlett Packard (HPQ) options volume is 2X the average daily, with 64,000 contracts traded and call volume representing for 65 percent of the activity.

Chevron (CVX) options volume is running 3X the average daily, with 62,000 contracts traded and call volume accounting for 60 percent of the activity.

Increasing options activity is also being seen in Clinical Data (CLDA), Marathon Oil (OIL), and Zimmer Holdings (ZMH).

Implied Volatility Mover
The CBOE Volatility Index (.VIX) is rallying. The market's “fear gauge” is now up 4.41 to 20.84 on a turbulent day for the global financial markets. VIX is touching levels last seen in early-December. Since the index tracks the expected volatility priced into S&P 500 Index (.SPX) options, it often moves higher when portfolio managers are buying SPX puts to hedge portfolios. That is, VIX will spike with the demand for portfolio protection is on the rise. 264,000 puts and 115,000 calls traded in the S&P 500 Index pits so far.