Puts Are Your Friend (Again) 05-20-2010

Cusick’s Corner
In markets like these, puts are your friend. The market’s jitters have turned into a barrage of selling in all major sectors. The SPX broke through the 200-Day Simple Moving Average [SMA]. A stock or index trading below the 200-Day SMA is generally considered to be in a downtrend. To get the 200-Day SMA for any stock, ETF, or index, use optionsXpress Streaming Charts and apply the Upper Study listed as SMA. Then click on the SMA label in the upper left and change the “Window” of time from the default to the number of trading days of your choice, for example 200 in this case. Make sure to click on “Draw” to create the 200-Day chart. For practice, check out the NDX 200-Day SMA as well – also broke below that level. See you After Hours.

The major averages are suffering another round of steep losses, amid ongoing weakness in global equity markets and disappointing economic news Thursday. Stock index futures were under water pre-market after stocks fell across Europe and Asia. There wasn’t one specific catalyst for the weakness overseas and it appears to be an extension of a recent move out of riskier assets like stocks and commodities. Making matters worse, the Labor Department reported that weekly jobless claims rose by 25,000 to 471,000 in the week ended May 15. Economists were looking for a decline to 440,000. A deteriorating jobs outlook added to the worries and the Dow Jones Industrial Average opened lower. The selling gather additional momentum mid-morning and the Dow is down 300 points midday. The tech-heavy NASDAQ lost another 85. Crude oil is off an impressive $3.4 a barrel to $66.45. Trading in the options market reflects the anxiety, with about 6 million calls and 8.9 million puts traded at 12:30 ET.

Bullish
Caterpillar (CAT) is down $2.93 to $58.51 and one strategist is using the weakness to enter a bullish August 62.5 call – January 45 put risk-reversal, 5000X on CBOE. The strategist paid a net debit of 25 cents to buy the calls, sell the puts. It appears the spread was repeated more than once, because volume in both contracts now exceeds 10,000 contracts. However, it doesn’t look like a straight bullish bet, as this risk-reversal was also tied to a 330,000 Caterpillar shares (or a reverse “collar” trade.)

Advanced Micro (AMD) calls are busy. Shares are down 38 cents to $8.09 amid broader weakness in the technology sector, ahead of earnings from DELL after market today. In options action, 13,000 calls and 3,100 puts traded on chipmaker AMD so far. The action includes 8740 June 8 calls. May 8 and 9 calls are seeing interest as well.

Bearish
Citi (C) puts are heavily traded. Shares are down 16 cents to $3.65 after influential banking analyst Dick Bove said US bank stocks might fall another 10 to 12 percent due to the impact of Financial Reform and the European Debt Crisis. 412,000 puts have already traded on Citi. June 4 puts are the most actives. January 5, June 3, and January 4 puts are seeing heavy trading as well. Meanwhile, implied volatility is rallying 15 percent to a multi month high of 67.

Staples (SPLS) is flat at $21.54 per share after the retailer reported quarterly earnings of 28 cents per share, which beat Street estimates by one penny. In the options, sentiment seems somewhat cautious, with 8,560 puts and 560 calls traded so far. May 22 puts are the most actives. 6,940 contracts traded and about two-thirds of those contracts traded at the Ask, suggesting put buyers. Open interest is already 6,750. So, some of the activity might be closing trades. Meanwhile, June 21 puts traded 1085X.

Unusual Volume Movers
Select Sector Tech Fund (XLK) options volume is running 5X the usual, with 95,000 contracts traded and call activity representing about 98 percent of the activity.

Verisign (VRSN) options activity is running 7X the usual, with 6,885 contracts traded and call volume representing about 62 percent of the volume.

Royal Caribbean (RCL) options volume is running 3X the usual, with 43,000 traded and put volume representing 86 percent of the activity.

iShares Brazil Fund (EWZ), Exco Resources (XCO), and Gamestop (GME) also have unusual volume.

Implied Volatility Movers
The CBOE Volatility Index (.VIX) is moving Thursday. The index, which tracks the expected volatility priced into S&P 500 Index options, is up 9.68 to 45 and, after rallying to 46.37, hit its best levels since March 2009 Thursday. VIX has now rallied 186 percent during the past month. Meanwhile, 128,000 puts and 49,000 calls have traded on the volatility index through midday Thursday.