The Good, The Bad & The Ugly 06-01-2011

Cusick's Corner
To say that this was an ugly close is an understatement. Now here's the good and the bad. The good is that the day is over (especially if you were long). The bad is that the market was down (300 on the Dow). This was a solid distribution day with a close below the lows of yesterday and volume to boot. This move caught most traders and investors off guard and the Claims data out tomorrow might only amplify the downside push. The Flight to Safety trade was in full bloom -- treasury yields hit their lows, sub 3% on the 10 yr. For those who are on the sidelines, closet bulls, and are looking at this pullback as a potential entry point, look at in-the-money (ITM) call spreads, especially if the volatility has popped. This strategy takes a conservative approach because you are buying ITM calls and to mitigate the premium risk with this purchase, you sell at-the-money calls, mitigating volatility risk and premium risk of the long option. You do give up upside but fixed risk might allow you to sleep better. See you Midday.

The month of June is off to a rocky start on Wall Street. Stock index futures came under pressure before the stock exchanges opened after ADP reported that the US economy added just 38,000 private sector payrolls during the month of May. Economists were looking for an increase of 170,000. After a 128-point rally Tuesday, the Dow Jones Industrial Average opened sharply lower on the poor jobs number. Data released later showed Construction Spending up .4 percent in April, which was above expectations of -.5 percent. However, the latest ISM Index of manufacturing activity fell to 53.5 last month, which was down from 60.4 in April and well below expectations of 57.6. The weak manufacturing number added to the worries and the Dow was down 145 points at midday. Selling pressure intensified a bit in the second half of trading and, at the closing bell, the industrial average had lost 280 points. The tech-heavy NASDAQ took a 66-point hit.

Bullish
Oil service company Ensco (ESV) saw relative strength and bullish options action today. Shares of the London-based driller gained 98 cents to $54.30 after UBS upgraded the stock to Buy from Neutral. Options volume was 6X the average daily. 18,000 calls and 10,000 puts traded in the name. The biggest options trades hit on the CBOE in morning trading, as July 48 puts traded at 60 cents and July 55 calls at $1.77 and $1.78. One investor was paying $1.18 and $1.17 for the July 48 - 55 bullish risk-reversal and did the trade 7500X according to a source on the exchange floor. They were buying 7,500 July 55 calls and selling 7,500 July 48 puts. The bullish play, which appears to be opening, will pay off if shares continue to rally through the July expiration in 44 days.

Bullish trading was also seen in Orexigen Therapeutics (OREX), Apollo (APOL), and Petrohawk (HK).

Bearish
TIVO puts were heavily traded today. After gaining 9.5 percent last week, shares gave up 19 cents to $10.15 today and are off 2.1 percent on the week. Meanwhile, options volume in TIVO was clearly lop-sided, as 19,000 puts and 4,000 calls traded in the name. January 11 puts, which are now 7.7 percent in-the-money, were the most actives. 8,441 traded and, with 70 percent trading at the ask and no existing open interest, the action looks like opening put buying. August 10, November 9, November 10 and November 11 puts saw interest as well. Implied volatility increased by 8 percent to 45.5, as some investors seem to be bracing for a potential drop in TIVO shares in the months ahead.

Bearish flow also surfaced in Calpine (CPN), Bank of Ireland (IRE), and Rite Aid (RAD).

Index Trading
CBOE Volatility Index (.VIX) sprung back to life today. The market's "fear gauge" jumped 2.85 to 18.30, as risk perceptions were on the rise today. Not only did VIX move up, but safe haven buying gave a bid to bonds and gold. While the yellow metal gained $2.40 to $1,538.30, the yield on the ten-year Treasury note, which moves opposite to price, dipped below 3 percent for the first time this year. Meanwhile, defensive trading was seen in the index market. 759,000 puts and 490,000 calls traded across the S&P 500 Index (.SPX), S&P 100 Index (.OEX) and other cash indexes. VIX June 15 puts were the most actives. Beyond that, SPX short-term OTM puts, like the June 1,300s, saw heavy trading. The S&P 500 lost 30.65 points to 1,314.55.

ETF Action
Put volume picked up in the SPDR Retail Trust (XRT). This exchange-traded fund tracks the performance of more than 90 different retailers and lost $1.57 to $52.57 on the day. The options volume was 106,000 puts and 11,000 calls. One noteworthy trade surfaced midday when a 10,000-contract block of September 48 puts traded on the $1.05 bid price. At the same time, 5,000 Sep 44 puts traded at the 52-cent asking price and 5,000 Sep 52 puts at the $2.20 asking price. The trade is a butterfly spread, in which the strategist sold the September 48 puts for the body and bought half as many of the 44s and 52s for the wings. This spread is a bearish play, as it makes its best profits if shares fall to $48 through the September expiration.