Gridlock Continues 07-28-2011

Cusick Corner
Gridlock continues and hedging was the name of the game. This will be short because this budget impasse makes trading or investing dicey at best. If we go into the weekend with no resolution and more politicking, volatility will continue to grow and further uncertainty will turn into true fear. Trim risk where you can and I would contemplate adjusting your size on any position. See you Midday.

Stock market averages are holding gains with help from economic data, but the overall tone of trading remains cautious amid ongoing concern about the US debt situation. After falling 198 points yesterday, the Dow Jones Industrial Average opened steady after the Labor Department reported that jobless claims fell by 24,000 to 398,000 last week. Economists were looking for a smaller decline of 7,000. A separate report released later showed Pending Home Sales up 2.4 percent in June. A 3 percent decline was expected. The day's earnings news is mixed. Exxon Mobile (XOM) is down 1.6 percent and the biggest loser in the Dow after the oil giant released results Thursday morning. Sprint (S), BMC Software (BMC), and Akamai (AKAM) are also among the names seeing post earnings weakness. Goodyear Tire (GT), Green Mountain Coffee Roasters (GMCR) and Skechers (SKX) are running higher on better-than-expected results. Meanwhile, the underlying tone of trading remains cautious, as the stalemate over budget plans continues in Washington heading into the August 2 deadline to raise the debt ceiling. Still, after three days of losses, the Dow has added 51 points. The NASDAQ gained 30. CBOE Volatility Index (.VIX) is coming off one-month closing highs and is down 1.24 to 21.74. Trading in the options market is a bit slower than yesterday, with 5.4 million calls and 5 million puts traded across the exchanges so far.

Bullish Flow
The top options trade so far today is in the Select Sector Financial ETF (XLF). Shares have added 14 cents to $14.97 and one investor bought a 50,000-contract block of September 16 calls at 15 cents per contract. Open interest in the XLF Sep 16 calls is already 361,418 contracts and the second largest position in the exchange-traded fund. So, today's massive premium purchase might be a closing trade. Or, this might be an opening play on hopes for a resolution of the budget stalemate and a rebound in the financials through September. The contract is currently 6.9 percent out-of-the-money and, if bought at 15 cents, the upside breakeven is at $16.15 at the expiration, which represents a 7.9 percent rally over the next 50 days. XLF is an exchange-traded fund that holds all of the financial names from the S&P 500.

Skechers (SKX) shares are running higher and options on the footwear maker are very actively traded after the company reported earnings that beat Street estimates. Skechers posted a loss of 34 cents per share, which was not nearly as bad as the 64-cent loss that analysts had expected. SKX added $2.48 to $16.77 through midday and options volume is 10X the average daily for the name. 12,000 calls and 5,390 puts traded so far. September 17 calls, which are 1.4 percent OTM and expiring in 50 days, are the most actives. Looks like upside call buyers, as 3200 traded and 89 percent of the volume hit at the ask. October 15 calls and October 17 puts on SKX are actively traded today as well.

Bearish Flow
Clearwire (CLWR) shares are trading to new 52-week lows today after Sprint (S) announced a new partnership with LightSquared. The deal is apparently a negative for Clearwire because it puts their deal with Sprint at risk and Clearwire is still seeking funds to build out its phone network. CLWR is down 55 cents to $2.22 and options are very heavily traded in the name. 17,000 calls and 35,000 puts so far. Typical volume through midday is about 1,900 contracts. The largest trades of the day were part of ratio spread, in which the investor apparently sold 6,000 December 3 puts and bought 12,000 December 1 puts. The action has the hallmarks of a roll, or closing out a position in in-the-money puts to open a new bearish position (twice the size) in out-of-the-money put options.

Royal Caribbean (RCL) is trading down $3.26 to $32.50 on earnings news and put volume in the cruise line operator is outpacing call volume by a ratio of three-to-one. 18,000 puts and 6,000 calls traded in RCL so far. August 30 puts, which are 7.7 percent out-of-the-money and expiring in a little more than three weeks, are the most actives. 5,550 traded. Jan 30, Aug 31, Jan 35, Aug 38, and Jan 40 puts are seeing interest as well. There seems to be a mix of buying and selling, but the overall flow seems somewhat bearish and to reflect concerns that shares of Royal Caribbean might sink further in the weeks/months ahead.

Unusual Volume
Sprint Nextel (S) options volume is running 5X the (22-day) average, with 92,000 contracts traded and call activity accounting for 72 percent of the volume.

Akamai (AKAM) options volume is 4X the average daily, with 68,000 contracts traded and put volume representing 52 percent of the activity.

Clearwire (CLWR) options volume is running 17X the average daily, with 52,000 contracts traded and put volume representing 69 percent of the total volume.

Increasing options activity is also being seen in Goldcorp (GG), Teva Pharmaceuticals (TEVA) and ATP Oil and Gas (ATPG).

Implied Volatility Mover
Starbuck's (SBUX) options are actively traded and implied volatility is moving higher ahead of earnings. There seems to be some optimism building, because shares are up $1.65 to $40.62. Meanwhile, 24,000 calls and 13,000 puts traded in the name so far. August 39, 40 and 41 calls are the most actives, as some investors appear to be taking positions on hopes for a post-earnings rally in Starbucks. Implied volatility has moved up 6 percent to 34 ahead of the results, due out after the closing bell.