And Cats Like Dogs Today... 06-03-2011

Cusick's Corner
The market just did not have the comeback power of the Mavericks and why should it? The latest labor stats cannot be blindly cast aside even though there's potential for more stimuli on the forefront. What confused some traders was that the VIX actually pulled back. But to event traders this is typical, price-in the event and when the event occurs pull it right back out. That is exactly what happened in the VIX today, but that should not make us too complacent! And that may seem odd to some, markets and price do not always move in a linear fashion. The Dollar is down, bonds are down, the Yen is down and Cats like Dogs today. However Gold and Copper are up -- this is how markets can move and we need to be prepared to trade them. I will be reviewing some trades over the weekend. I will be looking for some possible in-the-money call or put verticals on names or sectors that I am bullish or bearish on, where the probabilities are more in my favor. An example would be the Dell July 14-17 call vertical for a $1.60, basically getting me into the stock at parity (I would prefer to get in at a discount). If I wanted to buy 100 shares of Dell at $15.60, I would have to lay out $1560. In this case, I would prefer to buy the call spread instead for $160 with the knowledge of capping profits at $17, but if stock never moves then I am breakeven at worst. See you After Hours.

Volatility picked up on Wall Street Friday morning after the Labor Department reported that the US economy added just 54,000 jobs in May. Economists were looking for an increase of 169,000. In addition, April numbers were revised down to 232,000 from 244,000. Meanwhile, the unemployment rate edged up to 9.1 percent from 9.0 percent. Economists were expecting the rate of unemployed to hold steady at 9.0 percent. The poor numbers triggered some volatility when stock exchanges opened on Wall Street. However, after the early sell-off, the situation quickly stabilized heading into the ISM Services Index, which released at 10:00am ET. The report showed an increase to 54.6 in May, from 52.8 the month before. Economists were looking for the gauge of economic activity outside of manufacturing to increase to 53.3. The Dow Jones Industrial Average was digging out of a hole and down just 60 points at midday, up more than 80 points from session lows. Now, with ninety minutes left to trade, the industrial average is down 84 points and the tech-heavy NASDAQ has lost 29.4 points.

Bullish
Dryships (DRYS) shares are up and options are busy after Goldman Sachs upgraded the dry bulk shipper to Buy from Hold. The stock added 32 cents to $4.15 and options volume is 33,000 calls and 8,470 puts. The biggest trades in DRYS are part of a spread. In this play, the strategist sold a 5000-contract block of September 3.5 puts at 17 cents. They also bought 5,000 of the September 5 - 6 call spreads at 12 cents. Therefore, they collected a nickel on the package and are probably a willing buyer if shares fall to $3.5 and the puts get assigned. At the same time, they are probably looking for the stock to rally beyond $5 and towards $6 through the September expiration.

Bullish trading was also seen in Brocade (BRCD), Lowe's (LOW), and Harmony Gold (HMY).

Bearish
LDK Solar (LDK) puts are actively traded today. Shares of the Chinese maker of power plants and other solar energy products are down 37 cents to $6.79. 26,000 puts and 8,285 calls have traded in the name. September 6 puts, which are 11.6 percent out-of-the-money, are the most actives. One player bought a 5,000-contract block at 72 cents per contract. 14,235 now traded and open interest is 4,948. It appears that buyers are opening new positions. July 10 put and calls are actively traded, as some players in the options market appear to be bracing for volatility in LDK. It might be a play on earnings, due next Tuesday.

Bearish flow also surfaced in Arch Coal (ACI), EBIX.com (EBIX), and AMR.

Index Trading
CBOE Volatility Index (.VIX) slipped today, even as the S&P 500 Index (.SPX) is trading down 12.81 points to 1,300.13. VIX, which normally moves higher when the S&P 500 falls, is off .11 to 17.98. VIX is edging lower perhaps because the unemployment report was bad, but the news is out and therefore this important event risk has passed. Yet, while VIX has eased a bit, trading in the options market remains defensive Friday. With an hour left to trade, 338,000 calls and 706,000 puts traded on the S&P 500 Index (.SPX), S&P 100 Index (.OEX), and other cash indexes today. The fact that put volume is outpacing call volume by a ratio of two-to-one indicates that some investors are probably buying index puts to protect stock portfolios.

ETF Action
SPDR Utility ETF (XLU), which is an exchange-traded fund that holds all of the utility names from the S&P 500, is down 20 cents to $33.22. In options action, one investor bought a 5,000-contract block of July 34 call options at 20 cents per contract in morning action. Total volume is now 13,538 against only 919 in open interest. The contract is roughly 2 percent out-of-the-money. Today's investors appear to be buying-to-open new positions in the contract on hopes for a rally in the utility sector before the July expiration, which is in 42 days.