Buon Weekend! 07-15-2011

Cusick's Corner
Overall the data and news were not so great today but corporate headlines supported this market. To keep track of this earnings cycle, go to the optionsXpress Research tab and click on the Earnings Calendar to get the listings of stocks coming out with earnings each day next week. Also look for stocks that are in the same sector as the underlying positions in your portfolio, plus monitor the results and any movements by setting up alerts on the Alert Manager. The stalled debt talks and European debt crisis will be on everyone's mind over the weekend. Review your final positions and get ready for the new week. Buon Weekend! See you Monday.

Stock market averages opened higher, but trading has since turned mixed on options expiration Friday. Positive corporate news helped set the stage for morning gains after Google (GOOG), Mattel (MAT), and Citi (C) posted earnings that topped expectations. Meanwhile, Clorox (CLX) and Petrohawk (HK) are rallying around buyout news. The day's economic data were mixed, however. The Consumer Price Index [CPI] for June fell .2 percent and twice as much as expected. Industrial Production rose .2 percent and in-line with expectations. On a down note, the latest NY Empire State Index fell to -3.76 in July. Economists were looking for the gauge of regional manufacturing activity to register an increase of 1.0. The latest consumer sentiment index from the University of Michigan was also weak. It's down to 63.8 in July, from 71.5 in late-June and much worse than the 71.4 that economists had expected. Deadlock on budget talks along with recent warnings from credit rating agencies about possible downgrades to US triple-A credit rating are also weighing on investor sentiment.

Bullish
Electronic Arts (ERTS) added 9 cents to close $23.60 and an interesting three-way spread trades in the 2013 options on the video game maker. In this trade, the strategist apparently sold 2,350 Jan13 17.5 puts at $1.40 and bought 2,312 Jan13 25 calls at $3.65 and sold 2,612 Jan13 30 calls at $1.95. The spread was repeated several times and volume in all three contracts is 5,200 contracts. It is likely one strategist is driving the flow. They're selling January 17.5 puts to buy the January 25 - 30 call spread and paying a net debit of about 30 cents. It's a bullish play that pays off well if shares rally beyond the $25.30 breakeven through the January 2013 expiration. If shares fall below $17.5 during that time instead, the strategist will be assigned on the puts and asked to buy the stock at $17.50.

Bullish trading was also seen in Medivation(MDVN), Hess (HES), and Southwest Energy (SWN).

Bearish
While Electronic Arts sees a bullish three-way play, Salesforce.com (CRM) is the subject of a bearish three-way spread Friday. Shares have added $2.60 to $153.08 and one investor appears to have sold 1,340 August 170 calls on the retailer at $2.49 per contract and bought the August 150 - 135 put spread at $4.49 per contract. Therefore, they paid $2 (plus commissions) for the three-way and appear to be bracing for shares to fall from now through the August expiration (35 days). If shares rally beyond $170 instead, they could face assignment on the short calls and be asked to sell the stock at $170 per share. A shareholder might have initiated the trade as a hedge after a 16.1 percent year-to-date rally in CRM shares.

Bearish flow also surfaced in Brinker International (EAT), MBIA (MBI), and CBS.

Index Trading
CBOE Volatility Index (.VIX) saw a morning rally to 21.68, but has since given up the gains and finished -1.27 to 19.53. Still, the volatility index has had a strong week and is up 36 percent since last Friday. Worries about the European Debt Crisis, deadlock on budget talks, and poor economic data have conspired to raise anxiety levels on Wall Street. Uncertainty about the upcoming earnings-reporting season is a factor as well. Consequently, VI X - the market's "fear gauge" - has been moving higher and some investors have been buying July 25 call options on the index. 104,247 contracts traded yesterday and open interest increased by 30,570. Another 34,930 have changed hands. Buying of these calls is a short-term bet, as July options on the VIX expire Wednesday and after today they have only two trading days of life remaining.

ETF Action
A lot of the action in the ETF options today is closing and rolling trades ahead of the expiration. Today is the last day to trade July equity and ETF options. However, one investor was showing some interest in Weekly contracts on the SPDR 500 Trust (SPY) Friday morning. Shares closed up 76 cents to finish $132.03 and the focus was on the Weeklys that expire next week, on July 22. In this spread, they apparently bought 10,000 Weekly 129 puts at 76 cents and sold 10,000 Weekly 125 puts at 27 cents. So, a 49-cent debit was paid for the spread. Since volume exceeds open interest in both contracts, this looks like new positioning and a bet that the S&P 500 will drift lower next week. Excluding commissions, the breakeven at the expiration is at $128.51, or about 2 percent below current levels. The entire debit is at risk if the position is held through the expiration and SPY shares hold above $129.