When One Commodity Goes, the Rest Follow 05-05-2011

Cusick's Corner
When one commodity goes, the rest will follow. That is a 10,000 foot perspective, but when you saw Silver, SLV, tip and the margin requirements adjust up, so far twice, levered players are going to have to make some shifts. We also have a Dollar, UUP, firming today and the Base Metals, most notably Copper, pulling back on fears of slower domestic and global growth. I have been professing protection but I would also look at stock replacement with options. I have spoken about this before -- selling stock and purchasing a call 60, 90, 120 or greater days out, raising cash while still being exposed to long side by using a long call. Strike selection will be critical, i.e. if you are more conservative consider buying deeper in-the-money calls, and while volatility is moderate/low, I do not have a problem buying options. See you After Hours.

Stocks opened broadly lower on disappointing jobless claims data, but trading has turned mixed at midday. A report released before the opening bell on Wall Street showed weekly jobless claims increasing by 43,000 to 474,000 in the period ended April 30. Economists were left dumbfounded. They had expected a decline to 400,000. Separate data on Productivity was up 1.6 percent in the first quarter, which was better than the 1 percent that was expected. However, the claims numbers drove the market lower in early trading, as the bad news comes one day before the Labor Department releases key monthly jobs numbers. Meanwhile, the action in the commodities markets is getting some attention for a fourth day this week. Crude oil prices plunged $7.40 to $101.84 per barrel. Gold lost $33.50 to $1,481.80 an ounce. Commodity prices are falling on concerns about the economy and amid a rally in the dollar. The Dollar Index is up 1.3 percent. Exxon Mobile (XOM) is down 1.6 percent and the Dow's biggest loser. The Dow Jones Industrial Average is off 44 points, but the tech-heavy NASDAQ added 6.8. The CBOE Volatility Index (.VIX) edged down .18 to 16.90. Options trading volume is running at a solid pace, with 5.6 million calls and 5.3 million puts traded through 11:30 central time.

Bullish Flow
KLAC Tencor (KLAC) calls are busy amid relative strength in the chip equipment stocks today. Novellus (NVLS), Teradyne (TER), and Xilinx (XLNX) are moving higher on the session. KLAC has added $1.17 to $45 and options volume is running double the usual. 5,000 calls and 980 puts traded in the name through midday. June 46 calls, which are now $1 out-of-the-money and expire in 43 days, are the most actives. 1,045 traded. The rest of the action is scattered across a variety of May, June, September and January call options. The bullish trading appears to be part of a sector play. Semiconductor equipment makers NVLS and TER are seeing increasing call volume as well.

Visa (V) call options are actively traded ahead of earnings. Shares are down 56 cents to $79.21. Options volume includes 19,000 calls and 3,950 puts. The biggest trade of the day is an 1,800 contract block of June 80 calls at $2.12 per contract when the market was $2.14 to $2.21. Looks like a buyer initiated the trade. 3,060 traded. The weekly 80 calls, which are 1 percent out-of-the-money and expire after tomorrow, are the most actives. 3,970 traded. May 80 and 82.5 call options are busy as well. There seems to be mix of buying and selling of Visa call options ahead of the profit report, which is due out after the closing bell.

Bearish Flow
CurrencyShares Euro Trust (FXE) is down $2.52 to $145.20 on a rough day for the European currency. Over the past few months, the euro had rallied from 1.29 to 1.49 against the buck. A violent reversal happened Thursday after the European Central Bank said it was leaving rates unchanged and ECB President Trichet made dovish comments at the conclusion of the meeting. The euro tumbled on diminishing expectations for an ECB rate hike in June. FXE, which is designed to track the currency pair (x100), is under pressure. Today's options volume of 32,000 puts and 2,270 calls is 2X the average daily for the exchange-traded fund.

American Eagle (AEO) shares are down and puts are actively traded today. Shares of the apparel retailer are off 56 cents to $15.15. 8,400 puts and 2,110 calls traded in the name so far. June 15 puts, which are now 15 cents out-of-the-money and expire in six weeks, are the most actives. 6,050 traded and, with 81 percent trading at the ask, it appears that buyers are dominating the action in AEO puts today. It's perhaps hedging activity around earnings. The company is due to report results later this month.

Unusual Volume
iShares Silver Fund (SLV) options volume is running 2X the (22-day) average, with 1.5 million contracts traded and call volume accounting for about 54 percent of trades.

US Oil Fund (USO) options volume is 3X the average daily, with 274,000 contracts traded and put volume representing for 65 percent of the activity.

Eastman Kodak (EK) options volume is running 4X the average daily, with 65,000 contracts traded and put volume accounting for 77 percent of the activity.

Increasing options activity is also being seen in Petrohawk (HK), Equinix (EQIX), and the Powershares Bullish Dollar Fund (UUP)

Implied Volatility Mover
General Motors (GM) implied volatility is easing after earnings. The automaker reported earnings and revenues that topped expectations Thursday morning, but after a 10-day 11.7 percent rally in the share price, GM is down 62 cents to $32.42. Options are actively traded, with 60,000 calls and 31,000 puts on the tape so far. May 33 calls and January 30 puts are the most actives. Meanwhile, implied volatility has eased about 6 percent to 32, now that the earnings risk has passed.