Downside a Worry? 04-18-2011

Cusick's Corner
The EU and S&P strike, the market reacts pulling back on the open and trying to bounce into the Midday. This is the red flag that I saw coming but just didn't know what was going to be the catalyst, now we have some. If the downside is a worry, consider bear put spreads on a broad based index or ETF. For example, if you have a portfolio of securities that are represented in the S&P 500, you could purchase an at-the-money put, SPY 130 and sell an out-of-the-money put preferably at a level where you deem support will kick in, SPY 127. This gives 3 point downside coverage minus what you pay for the spread, at the time of the writing $1. See you After Hours.

Stock market averages opened sharply lower after S&P downgraded US' credit rating to negative. The news surfaced thirty minutes before the opening bell on Wall Street. Prior to that, stock index futures had already dipped into the red on concerns about another rate hike in China, the European Debt Crisis, and lackluster revenue numbers from Citigroup (C). Then, stock index futures fell sharply on the downgrade. The Dow Jones Industrial Average opened lower and never recovered. The Dow is down 217 points and the tech-heavy NASDAQ lost 52 at midday. CBOE Volatility Index (.VIX) added 2.75 to 18.07. Overall options volume is respectable and a bit more defensive today, with 6.1 million calls and 5.7 million puts traded through 1:15 pm ET.

Bullish Flow
Computer Associates (CA), an Islandia, NY application software developer, is seeing increasing options action today after a Wall Street analyst upgraded the stock to Neutral from Sell. Shares aren't reacting to the upgrade and are trading down 67 cents to $23.51. However, options volume is running twice the average daily. Call volume is approaching 3,000 contracts. 265 puts have changed hands. May 25 calls, which are now 6.3 percent out-of-the-money, are the most actives. 2,000 traded. Some investors appear to be taking positions in the contract, possibly betting that the stock will rally beyond $25 through the May expiration, which is in 32 days.

Mittal Steel (MT) is trading down 91 cents to $34.05 and today's call volume of 6,460 contracts is 5X the normal for midday. By way of comparison, 1,290 puts have changed hands. June 35 calls, which are now 2.8 percent out-of-the-money, are the most actives. 4,457 traded and, with two-thirds trading at the asking price, it looks like call buyers are dominating the action. It might be a play on earnings, due the morning of May 11.

Bearish Flow
STEC, a storage device maker, is trading down 76 cents, or 4 percent, to $18.10 and options volume is running 4X the average daily. 9,430 puts and 3,510 calls traded in the name so far. The at-the-money May 18 puts are the most actives. 4,750 traded and 81 percent of the volume is at the ask indicating increasing buying interest. It looks like buyers are taking positions in the May 17 puts as well. No news to explain the increased put activity and relative weakness in STEC today. Some players might be taking positions on concerns about earnings, which are due out early-May.

Cisco Systems (CSCO) shares are probing new 52-week lows and Cisco options are heavily traded today. Shares are down 37 cents to $16.66. 99,000 calls and 88,000 puts traded on the networking giant so far. The top trade of the day is a 20,000-contract block of June 15 puts. It was bought at 21 cents per contract, according to a source on the exchange-floor and appears to be a bet that Cisco shares will remain volatile in the weeks ahead.

Unusual Volume
Johnson & Johnson (JNJ) options volume is running 3X the (22-day) average, with 51,000 contracts traded and call volume accounting for about 58 percent of trades.

AMD options volume is 2.5X the average daily, with 40,000 contracts traded and put volume representing for 63 percent of the activity.

Akamai (AKAM) options volume is running 2.5X the average daily, with 38,000 contracts traded and call volume accounting for 74 percent of the activity.

Increasing options activity is also being seen in Avon Products (AVP), Cirrus Logic (CRUS), and Celgene (CELG).

Implied Volatility Mover
CBOE Volatility Index (.VIX) is up today after the S&P 500 Index (.SPX) tumbled for a 20-point loss. The volatility index had fallen to a new 52-week closing low of only 15.32 Friday. There was little fear priced into the market's "fear gauge". However, VIX moved sharply higher Monday morning and hit 19.07 in early trading after S&P said it had lowered US' credit rating. The news seems to have triggered a lot of interest in VIX options as well. 271,000 calls and 94,000 puts traded in the volatility index thus far.