Royal Put(z) Not to Be Confused with Married Put(z) 04-29-2011

Cusick's Corner
Some of you might have caught the subject line Married Put(z), this should not be confused with a Royal Put(z). That's enough of the Royals and wedding humor. At this stage the market it is getting a little harder to play the upside, at least buying outright stock with the market very extended and overbought. These conditions may continue and the market can build to the upside but as a conservative strategist, I would look to executing my bullish or bearish convictions by using spread strategies, i.e. consider bull or bear spreads. If you have some fear of a potential pullback in an underlying that you are long, have an idea of where support is if a pullback does occur and you want to hold on to the stock, then you could consider purchasing a put. Now this costs money and most of us struggle with the timing of purchasing a put and put rot, time decay. To offset that decay, sell a further out-of-the-money put strike against what you have sold, reducing the time and volatility risk that you have in owning an option. Hit the site this weekend, use the Trade Calculator and test out some of these ideas. By the way, you can watch the simulcast live of our Chicago workshop that we are putting on this Saturday, just use this web address http://www.xpressevents.com/EventScheduleList.aspx?EventId=263 to sign up. See you this weekend!

Stocks finished mixed on a day of slow trading Friday. Economic news was in focus early after a report released before the bell showed personal incomes and spending up .5 percent and .6 percent, respectively, in March. Economists were looking for .4 percent and .5 percent. Later, the Chicago PMI, a gauge of regional manufacturing activity, printed at 67.6 in April; down from 70.6 the month before and slightly less than the 68.0 that economists had expected. The final economic stat of the week showed the University of Michigan Consumer Sentiment Index at 69.8 for April, up from an initial reading of 69.6 and in-line with economist estimates. Earnings were a factor as well. While disappointing news from Microsoft (MSFT) and Research In Motion (RIMM) weighed on the tech sector, a number of other names - including Dow components Merck (MRK), Chevron Texaco (CVX) and Caterpillar (CAT) - saw post earnings gains. At the end of the day, strength in 18 Dow stocks was enough to offset a 3 percent slide in Microsoft shares and the Dow Jones Industrial Average finished with a 48-point gain. The tech-heavy NASDAQ moved in and out of positive territory in a see-saw session. At the closing bell, the NASDAQ was up 1 point.

Bullish
A noteworthy spread trades in Citigroup (C) late-Friday. Shares finished unchanged at $4.59. In afternoon Citi options action, an investor bought 43,000 September 5 calls at an average of 10.5 cents. They sold 86,000 September 5.5 calls for 3.5 cents. Therefore, they paid 7 cents for this Sep 5 - 5.5 (1X2) call ratio spread. There is substantial open interest in both contracts and so the spread might roll or close an existing position. If this is a new spread, it's a bullish play on the bank. It makes its best profits if shares rally to $5.5 through the September expiration, which represents a 20 percent rally over the next 140 days.

Bullish trading was also seen in Eastman Kodak (EK), Cheniere Energy (LNG), and Sprint (S).

Bearish
An interesting spread traded in Dillard's (DDS) today. In this spread, the investor bought 6,000 May 38 calls at $10.30 per contract and also sold 6,000 May 35 puts at a nickel. They also sold 6,000 June 45 calls at $4.90 and bought 6,000 June 40 puts at 75 cents per contract. Looking at the open interest data indicates that the strategist probably rolled a position. That is, they exited a May 35 - 38 risk-reversal and opened a new position in the June 40 - 45 risk-reversal. They rolled a bearish position up in strike prices and out an additional month. A shareholder might have initiated the position to adjust a hedge or (collar) against a position in shares.

Bearish flow also surfaced in NRG Energy (NRG), Jackson Hewitt (JTX), and Ivanhoe Mines (IVN).

Index Trading
The Russell 2000 Small Cap Index (.RUT) saw increasing options action today. The index, which has become the market's main benchmark for the performance of shares of smaller companies, finished the day up 3.74 to 865.29. 97,000 calls and 28,000 puts traded on the "Russell" In morning trading, the May 910 - 920 call spread saw interest. One investor sold the spread 11,500X at 30 cents. That is, they sold the 910s and bought the 920s. The spread traded more than 38,000X and appears to be new positioning. It seems to be bet that the small cap index will hold below 910 through the June expiration, which would represent a 5 percent move over the next 48 days. If so, the call spread writer keeps the 30-cent credit. The potential risk is $9.70 per spread (plus commissions) if the index rallies beyond 920.0.

ETF Action
Large call buyers in the Industrials Select Sector Fund (XLI) for a second time. Shares, which hold GE, United Technologies (UTX) and the other industrial names from the S&P 500, touched a new 52-week high on Caterpillar's (CAT) better-than-expected earnings. XLI finished the day up 16 cents to $38.70. In options action, one investor bought 100,000 June 40 calls at 44 cents per contract. At the end of the day, 104,956 contracts traded. Similar activity was seen Thursday when 109,306 contracts changed hands. The XLI June 40 call is 3.8 percent out-of-the-money and expires in 49 days. One large institutional investor might be accumulating the position as a way to get increased exposure to that one sector of the market.