Futures Finish at a Discount 03-04-2011

Cusick's Corner
Stocks bounced into the After Hours, finishing the week with the cash market, Stock Indices, at a premium to the Futures. This means many longs may have potentially done some hedging into the weekend. And this leads to a discussion that I often bring up at the week's end in the Corner -- protection. The choppy action, while consolidated, is something that could be expected for the next few weeks and insurance (puts) is still relatively cheap. With lines still being drawn in the sand, it may be worth reviewing the need for protection in your portfolio, whether an outright purchase of puts, a put spread, or even an in-the-money put fly (3 legs). Have a great weekend -- off to the hockey rink. Go Bulldogs!

Stocks finished broadly lower after crude oil rallied to its best levels since September 2008 today. The ongoing strength in crude oil is being fueled by escalating violence in North Africa and the Middle East. Crude is up $2.86 to $104.77 a barrel late Friday. The strength is raising concerns about the potential impact from higher energy on the global economy and, for that reason, bubbling crude oil overshadowed an upbeat economic report released early Friday. Before the opening bell on Wall Street, the Labor Department reported that 192,000 new jobs were created in February and the unemployment fell to 8.9 percent, from 9 percent last month. Economists were looking for an 185,000 increase in payrolls and an unemployment rate of 9.1 percent. Separate data released later showed January Factory Orders up a better-than-expected 3.1 percent. Economists were looking for an increase of 2.1 percent. The data did little to ease investor anxiety, however. Instead, the Dow Jones Industrial Average was deep under water into midday. There was an advance in the final hour. At the closing bell, the Dow Jones Industrial Average was down 88 points and up 90 points off session lows. The NASDAQ lost 14.

Bullish
PNC Bank (PNC), a Pittsburg, PA financial services company, finished the day flat at $60.95 after late-day strength helped lift the stock off session lows of $60.22. Meanwhile, a noteworthy spread surfaced in PNC Friday midday after one investor apparently sold a block of 4,500 May 55 puts at $1.39, bought 4,500 May 62.5 calls at $2.15 and sold 4,500 May 67.5 calls at 68 cents. They sold the May 55 puts to buy the May 62.5 – 67.5 call spread. It's a bullish three-way play that makes its best profits if shares rally to $67.5 or more through the May expiration. In addition, the investor is stating that they're willing to buy the stock at $55 should it fall below the 55 strike of the put option through the May expiration.
Bullish trading was also seen in Petrobras (PBR), Southwest (LUV) and Staples (SPLS).

Bearish
GOL Linhas Aereas (GOL) is a Brazilian airline that has had a rough time lately. Shares lost 14 cents to $13.18 today and have now fallen 26.3 percent over the past four months. It looks like some investors might be looking for additional weakness in the airliner, as the April 12.5 puts saw increasing interest today. The top trade was a block of 2,169 at 60 cents on the International Securities Exchange, where ISEE data indicate that the position was bought-to-open. 3,280 contracts traded total. These puts are 5.2 percent out-of-the-money with 42 days of life remaining.
Bearish flow also surfaced in Central European Distribution (CEDC), Cummins Engines (CIM), and Cracker Barrel (CBRL).

Index Trading
Trading volume picked up in the index market as players reacted to the increasing levels of market volatility today. 726,000 calls and 701,000 puts traded across the S&P 500 Index (.SPX) and other cash indexes, which is 120 percent the 22-day average, according to Trade Alert data. The most actives were call options on the CBOE Volatility Index (.VIX), which hit a high of 20.33 midday, but gave up most of the gains to finish the day up .46 to 19.06. VIX March 22.5, March 25, and April 30 calls were among the most actives. A total of 442,000 calls and 154,000 puts traded on the volatility index today, as some nervous investors were likely buying out-of-the-money calls on concerns about escalating volatility in the weeks ahead.

ETF Action
US Oil Fund (USO) saw another day of heavy trading. The exchange-traded fund, which tracks the price of crude through futures contracts, notched new 52-week highs and finished the day up $1.15 to $42.33. USO gained 16.4 percent over the past two weeks. Meanwhile, in options action, 318,000 calls and 123,000 puts traded on the ETF Friday, or 2.5X the recent average daily volume. April 49 calls were the most actives. 31,430 traded and 84 percent traded at the ask. Looks like call buyers were taking positions in the calls and looking for the run higher in crude oil to continue. The April 49 call is currently 15.8 percent out-of-the-money with 42 days of life remaining.