Support Held 07-18-2011

Cusick's Corner
Support held, 1295 on the S&Ps, and we finished the day above 1300 which is the psychological support, bringing this index, followed by the other majors, above the mid-term support of their 50-day moving averages. Tomorrow the market will focus on the Housing Starts and Permits, any positives that come out of this beaten down sector could give some potential boost. Big Tech and Finance will be the focus along with AAPL which was extremely active today, plus BAC and GS saw some potential volatility spreads (strangles). In front of these names, how can one estimate a potential move based on current options prices? Take the front month ATM straddle and the next strike out strangle and add them together then divide by 2, which would give you a general estimate of the potential range of underlying movement. So if you look at the APPL August options, the options are pricing an estimated potential move of +/- 21. See you Midday.

The stage was set for morning weakness on Wall Street after stock benchmarks moved broadly lower across Europe amid ongoing concerns about the European Debt Crisis. A round of bank stress tests across the Eurozone failed to ease those concerns, as nine banks didn't pass. France's CAC 40 Index helped pace the decline after losing 2 percent. Meanwhile in the US, concern is clearly mounting over the August 2nd deadline to raise the debt ceiling. Credit rating agencies warned last week that the US triple-A debt rating could be in jeopardy should the US default. Republicans and Democrats are scrambling to develop a fallback plan, but have so far failed to provide any hard solutions. On the economic front, the only stat of the day was a bit better-than-expected. According to the National Association of Homebuilders (NAHB), an index of builder confidence (HMI) improved to 15 this month, from only 13 the month before and better than the 14 that economists had expected. Earnings are also a factor this week, as more than 100 of the S&P 500 companies are due to release results. However, concern about debt at home and abroad seemed to be the primary driver for market action Monday. The Dow Jones Industrial Average lost 95 points and the tech-heavy NASDAQ gave up 24.7.

Bullish
Bank of America (BAC) options were heavily traded Monday ahead of earnings. The bank, and component of the Dow Jones Industrial Average, is due to release results Tuesday morning. Shares fell to 52-week lows Monday and finished down 28 cents to $9.72 ahead of the news. Meanwhile, in BAC options, 529,000 calls and 341,000 puts traded on the bank. September 9 puts were the most actives. 73,565 traded. 63,780 September 10 calls changed hands. Some of the action was due to spread trading. In morning action, one investor sold 5,500 September 9 puts at 28 cents to buy the September 10 - 11 call spread at 35 cents, 5500X. They paid a 7-cent net debit for the three-way spread and might be looking for shares to move beyond $11 through the September expiration and or they are willing buyers of the stock at $9 per share, which is the strike price of the short put options.

Bullish trading was also seen in Gilead Sciences (GILD), New York Times (NYT), and Northrop Grumman (NOC).

Bearish
Eastman Kodak (EK) put options saw heavy volume today. Shares fell to new 52-week lows and finished the day down 22 cents to $2.53. Options volume in EK was 147,000 puts and 36,000 calls. One of the top trades of the day was part of a combo. In this play, the strategist bought 5,000 October 2.5 puts at 36 cents and sold 5,000 October 3 calls at 25 cents. In other words, they bought the October 2.5 - 3 bearish risk-reversal for an 11-cent net debit. A similar trade surfaced in the September 2.5 - 3 risk-reversal, which traded at 10 cents, 3515X. EK shares are down nearly 30 percent month-to-date and these bearish trades might have been initiated to hedge or "collar" a position in shares. Or, the risk-reversals might be outright bets that Eastman Kodak shares will continue trading lower in the weeks/months ahead.

Bearish flow also surfaced in Clorox (CLX), Emulex (ELX) and Thermo Fisher Scientific (TMO).

Index Trading
Call options on the CBOE Volatility Index (.VIX) were busy today. VIX hit a morning high 21.93, its best levels in almost a month, and finished the day up 1.42 to 20.95. Options volume in the VIX trading pit today included 365,000 calls and 145,000 puts. July 25 calls, which saw very heavy trading last week, were the most actives. 43,949 traded. July 22.5 calls traded 37,947 contracts. It's likely that some investors were closing out positions in the July contracts and opening new ones in August, as the Aug 22.5 and 24 calls on the volatility index were also busy today. Although VIX moved higher on the day, the July calls are at risk of expiring out-of-the-money. Options on the volatility index expire Wednesday and the last day to trade the July contract is tomorrow.

ETF Action
An interesting spread trades in the Energy Select Sector Fund (XLE) today. XLE, which is the exchange-traded fund that holds all of the energy-related names from the S&P 500, finished the day down 26 cents to $76.60 after crude oil slipped $1.15 to $96.45 per barrel. In options trading, the top trades in XLE were part of a spread, in which the strategist bought 15,000 August 77 puts at $2.56 and sold 15,000 August 75 puts at $1.69. In other words, they bought the Aug 77 - 75 put spread for an 87-cent net debit. Excluding commissions, the spread offers a potential $1.13 payout if shares fall to $75 or less through the August expiration, which represents a 2.1 percent decline over the next 32 days.