Deal or No Deal? 07-27-2011

Cusick's Corner
The disruption of the grandstanding politicians is starting to spur on the hedge trade, Long Puts and Long Precious metals. The put activity in the S&Ps acting as an equity hedge and buying Gold as a risk off/protection trade (all while Greece is downgraded and Moody's reviews the US rating) may not be a bad plan. With VIX up 7% and the S&Ps pricing in a potential range of 50 points into August expiration, whether you are positioned bullish or bearish, vertical spread strategies may be the better choice. If you are bearish and the Volatility is higher, you could buy an out-of-the-money put butterfly or if you are bullish you buy an in-the-money bull call spread. The goal is to mitigate as much premium risk while improving Risk-Reward in uncertain times. See you After Hours.

Concern about debt and economic data sent stocks lower Wednesday morning. A report released before the opening bell on Wall Street showed orders for Durable Goods down 2.1 percent in June. The number disappointed because economists were expecting an increase of .5 percent. A profit warning from Juniper Networks (JNPR) and weak sales growth at Emerson Electric (EMR) added to the concerns about the economy. Meanwhile, a lot of focus remains on Washington, where budget talks in the House and Senate seem to be making little progress heading into an August 2 deadline to raise the debt ceiling. Consequently, the Dow Jones Industrial Average is down 113 points and the tech-heavy NASDAQ lost 53 through midday. CBOE Volatility Index (.VIX) added 1.54 to 21.77. Trading in the options market is picking up to the highest levels of the week, with 6 million calls and 5.9 million puts traded through 1 pm ET.

Bullish Flow
Ensco (ESV) is trading up 25 cents to $52.27 and options volume in the London-based oil and gas driller is running 4X the average daily after Morgan Stanley upgraded the stock to Over Weight from Equal Weight. The firm increased its price target to $80 from $75. Shares are up and 11,000 calls/1,100 puts traded in ESV, a ratio of ten-to-one. Morning trades include a buyer of 7,000 ESV August 52.5 calls at $1.60 per contract. The Aug 52.5 call on ESV is 23 cents out-of-the-money and expires in 23 days. 8,200 now traded. Ensco's earnings will come into play soon. The company is due to report on August 8.

A bullish three-way spread trades in Yahoo (YHOO) today. Shares are down 29 cents to $13.65 and one investor sells 17,000 January $11 puts at 43 cents to buy the January 17.5 - 20 call spread at 29 cents, 17000X. They collected 14 cents on the package and are probably looking for Yahoo to hold above $11 through the January expiration. If not, they could face assignment on those puts and be asked to buy the stock at that price level ($11). Better profits are possible if shares rally beyond $17.5, which is the lower strike price of the call spread. At that point, the profit is equal to the credit plus any gains on the call spread.

Bearish Flow
Puts on the SPDR Financials (XLF) are heavily traded Wednesday. XLF, which holds all of the financial-related names from the S&P 500, is down 23 cents to $14.96. Options volume in the ETF so far today includes 233,000 puts and 73,000 calls. The top trade of the day is part of a ratio spread, in which the investor bought 31,000 January 13 puts at 45 cents and sold 82,000 January 11 puts at 18 cents. This put ratio spread appears to be a very bearish play targeting a move in XLF towards $11 through the January expiration, which represents a decline of about 26.5 percent. Shorter-term August 14 and 15 puts on the financial ETF are heavily traded today as well.

Corning (GLW) shares lost $1.10 to $16.19 and options volume on the glass maker is running 3X the average daily after the company posted earnings that fell short of Street expectations. A noteworthy trade in Corning today is a seller of 27,000 January 2013 $17.5 calls at $1.91 per contract. This looks like a new position and was tied to 1.36 million shares of stock at $16.18 per share. The strategist is probably long the stock and looking for GLW to recover losses through 2013, but not make a significant move beyond $17.5 (the strike price of the short calls).

Unusual Volume
Amazon.com (AMZN) options volume is running 2X the (22-day) average, with 144,000 contracts traded and call activity accounting for 56 percent of the volume.

SPDR Industrial ETF (XLI) options volume is 3X the average daily, with 110,000 contracts traded and put volume representing 95 percent of the activity.

Williams Companies (WMB) options volume is running 3.5X the average daily, with 106,000 contracts traded and call volume representing 88 percent of the total volume.

Increasing options activity is also being seen in Juniper Corning (GLW), BP, and Boeing (BA).

Implied Volatility Mover
CBOE Volatility Index (.VIX) has extended its winning streak to three days. The market's "fear gauge" is up 1.61 to 21.84 and has added 21.9 percent on the week. VIX started climbing Monday after politicians failed to resolve the budget deadlock over the weekend. The trend continues through midweek and volatility index is moving to its best levels in more than a month. Trading in VIX options is busy as well. 267,000 calls and 70,000 puts traded in the product so far. August 25 and 30 out-of-the-money calls are the most actives, as some investors appear to be buying out-of-the-money August VIX calls and bracing for additional upside in the short-term. VIX August options expire in three weeks.