Tight Risk Parameters Key 05-14-2010

Cusick’s Corner
This is a “Tale of Two Cities” or should I say continents. The US landscape is improving, while the EU is just getting torn up. We are in the search for the lows -- look for 1125 as support. If the market does hold this 1125 level, then we could see a possible bounce going into next week. Folks, there is a ton of emotion that is working itself out in this market -- trading with tight parameters is the name of the game at this stage. Watch for a close above the lows and if you are trying to play the bounce into the close, keep the risk parameters tight. If you are going into the weekend with a position, then look to potentially spread off your risk. (Go to the blog, www.xpoundblog.com, to check out some ideas.) See you After Hours.

The major averages are deep in the red following a day of losses in overseas markets and a round of mixed economic news Friday. The table was set for early weakness on Wall Street after global equity markets suffered another day of losses. In Europe, France’s CAC 40 Index tumbled 4.8 percent. Germany’s DAX and UK’s FTSE both lost more than 3 percent and the euro sank to only 1.2369 on the dollar, down from 1.25 early in the day. European equity markets and the euro are under pressure amid ongoing concerns about the debt crisis and the potential impact on both banking systems and economic activity in the eurozone. Meanwhile in the US, the day’s economic news included a better-than-expected reading on retail sales (up .5 percent in April vs. .4 percent consensus), but a weaker-than-expected reading from the University of Michigan Consumer Sentiment Index (73.3 in May vs. 73.5 consensus). In the end, concerns about the European debt crisis trumped any economic news. The Dow Jones Industrial Average is down more than 200 points midday. The CBOE Volatility Index (.VIX) jumped 5.86 to 32.54. Trading in the options market is active and defensive, with about 5.5 million calls and 6.5 million puts traded at 12:30 ET.

Bullish
Dish Networks (DISH) is up $1.18 to $23.14 and the best gainer in the NASDAQ 100 on news an appeals court will review Tivo’s (TIVO) recent victory in a patent case. Shares are up and options volume is 5X the average daily, with 8,730 calls and 3,530 puts traded through midday. May 22 calls are the most actives after 4,780 contracts traded. 79 percent of the volume traded at the asking price and so it appears that call buyers are initiating much of the trades. May 23 calls are seeing interest as well.

Proshares Ultra Short Euro ETF (EUO) is up 46 cents to $24.49 and shares have gained 14.7 percent month-to-date. EUO is an exchange-traded fund designed to move 200 percent the inverse to the dollar/euro currency pair. It moves up when the euro falters against the buck. Some options traders are active in fund as shares rally Friday. 6,450 calls and 1,090 puts traded so far. May and June 25 calls are the most actives. June 24s and August 24s are seeing interest well. Some of these call buyers are probably taking positions on concerns about additional euro weakness (because bullish trades on EUO are bearish bets on the European currency).

Bearish
Credit card companies are lower after the Senate voted to restrict the fees charged for debit and credit card transactions. Visa (V) shares lost $8.60 to $77.13 and options volume rose to 4X the recent average daily, with 59,000 calls and 57,000 puts traded so far. May 80 puts are the most actives, with 20,280 traded and 65 percent trading on the bid. Some players are likely liquidating positions as shares falter and the puts are now in-the-money by $2.87.

Meanwhile, Mastercard (MA) is down $19.56 to $212.75 and options volume is 4X the average daily, with about 28,000 puts and 17,000 call options traded so far. Recent action includes sellers of January 240 calls at $15.90, which is possibly closing trades on concerns about additional weakness in Mastercard shares. May 210 and May 220 puts are the most actives. May 220 calls are seeing interest as well.

Unusual Volume Movers
Select Sector Technology Fund (XLK) options volume is running 3X the usual, with 38,000 contracts traded and call activity representing about 95 percent of the activity.

Sybase (SY) options activity is running 4X the usual, with 30,000 contracts traded and call volume representing about 98 percent of the volume.

Gamestop (GME) options volume is running 3X the usual, with 23,000 traded and call volume representing 51 percent of the activity.

Dish Networks (DISH), Asmel (ASML), Cirrus Logic (CRUS) also have unusual volume.

Implied Volatility Movers
TIVO implied volatility is elevated, as shares fall on a negative court ruling regarding a recent patent victory (see Bullish for more). Shares tumbled $6.91 to $10.48 and options volume is 7X the recent average daily, with 53,000 calls and 50,000 puts traded so far. Meanwhile, implied volatility is up about 7.5 percent to 101.