Safety Trade Gold All-Time High 05-11-2010

Cusick’s Corner
The market made a valiant attempt to break to the upside, but upside resistance of 1177 on the SPX (the level of that big drop which started last week) was not broken and the safety trade, Gold QOM10 $1233.50 +32.75, is at all-time highs. From a technical perspective, this short-term bounce has some challenges, especially if support of 1153 on the S&Ps cannot be held then the down ticks could get deeper. To explain this most recent bearish activity in terms of an option trader’s perspective, we are looking at a bearish environment with moderate implied volatility. From a strategic perspective, selling the underlying may seem to be the most logical choice. If you perceive that volatility is now relatively high, could look at what we suggested yesterday -- OTM call calendar spreads. If your outlook is that the market is bearish and volatility is relatively low, potentially consider selling ITM bear call spreads. See you Midday.

Stocks bounced around, in and out of positive territory, but finished little changed Tuesday. After a 405-point rally Monday, the Dow Jones Industrial Average opened lower following a day of selling in European and Asian equity markets. While European markets pulled back on waning optimism about EU’s $1 trillion bailout plans, China’s equities came under pressure following hotter than expected inflation data. The morning selling on Wall Street proved short-lived, however, and both the Dow and NASDAQ were back in positive territory midday. From there, market action was lackluster. At the closing bell, the Dow Jones Industrial Average was off 37 points and the NASDAQ finished flat.

Bullish Flow
A number of gold mining names, including Kinross Gold (KGC), Eldorado Gold (EGO), Agnico Eagle Mines (AEP), saw increasing options action after gold prices notched a new record close above $1220 an ounce. Yamana Gold (AUY) was one of them. Shares gained 70 cents to $11.39 and options volume rose to 3X the recent average daily. About 41,000 calls and 5,830 puts traded. May 11 calls saw the most action, and might have seen some closing trades as shares moved above the $11 strike price. 8,490 contracts traded. However, May and June 12 calls were among the most actives as well.

Electronic Arts (ERTS), Goldcorp (GG), and Arm Holdings (ARMH) also had bullish order flow.

Bearish Flow
Dean Foods (DF) shares spent two days behind the woodshed after the company reported earnings that fell short of expectations Monday morning. Shares tumbled 28.4 percent Monday and lost another 89 cents to $9.58 Tuesday. Options volume picked up as well, with 21,000 calls and 22,000 puts traded on the grocery chain Tuesday. The top trade was a block of 10,000 January 2012 puts at the 7.5 line. It traded at the $1.60 asking price and appears to be a new position. It’s possibly an investor looking to hedge a position in DF shares on concerns about additional weakness in the stock.

Bearish flow also picked up in Cardinal Health (CAH), Bank of New York (BK), and Halliburton (HAL).

Index Trading
After three days of wild gyrations, the CBOE Volatility Index (.VIX) experienced a day of relatively quiet trading Tuesday. VIX traded in a 5.2-point range and finished down .52 to 28.32. Meanwhile, in VIX options trading, 214,000 calls and 126,000 puts changed hands. One noteworthy trade was in June puts and calls at the 25 strike after a strategist bought the straddle (bought 25,000 June 25 calls at $5 and bought 25,000 June 25 puts at $2.75.) This massive premium purchase looks like a new position and, if so, one that makes profits if VIX sees substantial move before the June expiration.

ETF Trading
SPDR Gold Fund (GLD) options were busy Tuesday, as the yellow metal rose to record highs. Gold (June) finished up $31.50 to $1232.30 an ounce. GLD, which is an exchange-traded-fund that owns the commodity, finished the day up $3.09 to $120.66 an ounce. Options volume rose to 2X the average daily, with 243,000 calls and 132,000 puts traded. Yet, while sentiment seemed bullish, one player appears to be hedging their bets and bought a 1X2 June 120 – 114 put ratio spread, 5000X in afternoon trading. That is, they bought 5000 of the June 120s and sold 10,000 of the June 114s, which creates a bearish risk graph with a max pay-off at $114 per share.