Critical Levels Broken 06-23-2011

Cusick's Corner
Critical levels were broken in both equities and commodities and the Dollar currently is the trade. I did cover my short deltas this morning and am sitting flat but want to see if the Midday lows entice the Bid, seeing a little action in select names. In bond trading -- yields down, prices up, and TLT has breached the 97 level, technically signaling new support. I think the risk trade will be more of a nibble than a rush to get long and Tech is strong in spite of the market weakness. See you After Hours.

Disappointing economic data, tumbling crude oil prices, and a falling euro are weighing on Wall Street Thursday. Before the opening bell, the Labor Department reported that jobless claims increased by 15,000 to 429,000 in the week ended June 18. Economists were looking for the number to hold steady at 415,000. A separate report released later showed New Homes Sales falling to an annual rate of 319,000 last month; which was down from 326,000 in April, but not as bad as the 305,000 that was expected. Meanwhile, European markets closed sharply lower and the euro is down 1.2 percent against the dollar after ECB President Jean-Claude Trichet said warning lights are flashing on the Eurozone due to the debt crisis. Crude oil prices are also sharply lower on news the Obama administration and the IEA have made plans to unleash oil supplies from strategic reserves. Crude oil tumbled $4.22 to $91.19 and gold gave up $33.9 to $1,519.50. Suffice it to say that volatility is elevated a variety of financial and commodity markets today. The Dow Jones Industrial Average lost 162 points and the tech-heavy NASDAQ is down 13 at midday. The CBOE Volatility Index (.VIX) jumped 1.82 to 20.34. Overall options volume is picking up and decidedly more defensive, with 4.8 million calls and 6 million puts traded through 11:45am ET.

Bullish Flow
Pfizer (PFE) shares are up 1.9 percent to $20.67 and the best gainers in the Dow Jones Industrial Average today after the pharmaceutical company reported positive results from a Phase 3 study of a blood thinner drug called Eliquis. It was jointly developed with Bristol Myers (BMY), which is trading up 5.4 percent. In PFE options action, 42,000 calls and 33,000 puts traded so far. Typical volume at midday is 22,000 contracts. Trading is brisk in the July 21 calls, which are now 1.6 percent out-of-the-money and expiring three weeks from tomorrow. January 22.5 calls are seeing heavy trading as well.

Traveler's (TRV), the property and casualty company and component of the Dow Jones Industrial Average, is down 40 cents to $56.92 and one of twenty-seven Dow stocks under water today. Only PFE, Home Depot (HD), and Intel (INTC) are holding gains. Meanwhile, TRV options are actively traded so far. 4,000 calls and 2,100 puts have changed hands through midday. In morning action, one investor sold 750 January 60 puts at an average of $1.775 per contract and bought 1,500 January 65 calls at 75 cents per contract. They paid 27.5 cents for this 1X2 bullish risk-reversal and probably expect the stock to rally through January 2012. If shares fall below $60 during that time, they would face assignment on the 60 puts and asked to buy the stock at that price. However, like with any options trade, the position can also be closed out at any time prior to the expiration.

Bearish Flow
Options on a variety of exchange-traded funds are actively traded today. Total volume in the ETF market through midday is 3.7 million puts and 2.1 million call options. Typical volume is about 3.6 million contracts (puts and calls). Trading is heavy in the SPDR 500 Trust (SPY), the PowerShares QQQ (QQQ), the iShares Small Cap Fund (IWM), the iShares Emerging Markets Fund (EEM), SPDR Financials (XLF), and SPDR Energy Fund (XLE). Players are snapping up puts across the ETFs as market volatility picks up amid increasing worries about the short-term outlook for the US equities market.

Proshares UltraShort S&P 500 Fund (SH) is up 50 cents to $42.50 and options volume is running 7X the average daily for the ETF. 8,490 calls and only 9 puts traded in SH so far. July 45 calls are the most actives. 5,060 traded and, with 90 percent trading at the offer, it appears that buyers are taking positions in these upside calls. July 44 calls are seeing heavy trading as well. Since this exchange-traded fund is designed to move twice the opposite to the S&P 500, buying SH calls is a bearish speculative trade.

Unusual Volume
Sara Lee (SLE) options volume is running 100X the (22-day) average, with 150,000 contracts traded and call activity accounting for nearly all of the volume.

Bristol Myers (BMY) options volume is 3.5X the average daily, with 81,000 contracts traded and call volume representing 54 percent of the activity.

Fifth Third (FITB) options volume is running 18X the average daily, with 70,000 contracts traded and call volume representing 50 percent of the total volume.

Increasing options activity is also being seen in Union Pacific (UNP), Bed, Bath and Beyond (BBBY), and Red Hat (RHT).

Implied Volatility Mover
CBOE Volatility Index (.VIX) hit a morning high of 21.50, but has since given up half the gains and is up 1.52 points to 20.04. The volatility index is up, but there are no signs of panic in the "fear gauge". The volatility index, which tracks the expected volatility priced into S&P 500 Index options, is rallying, but still well off the highs seen in March when it jumped to 31.28. Indeed, trading in the index pits is orderly. 136,000 calls and 358,000 puts on the S&P 500 so far today.