Quad Witches Brew 06-16-2010

Cusick’s Corner
The market held its ground into the close in the face of the EU’s continued debt concerns (Spain and Portugal) and the quickly approaching “quad witching”. With the amount of data due out over the next couple of days, CPI and Claims out in the pre-market, it is best to keep your position and capital sizing in check. Funny things tend to happen during a quad witching expiration week and as a former floor trader, I have seen fortunes made and lost during this week. Some key sectors to keep an eye on are large cap tech like AAPL and GOOG -- monitor if they continue to lead and further breakout. Also watch to see if the broken resistance in the S&P, 1110 can hold as support, and check if Gold, Silver and Bonds are not able to break resistance, signaling that a flight to equities is still on. If not, this could be a signal of a potential stall and breakdown in equities. See you Midday.

Stocks battled back from early losses and finished mixed Wednesday. After a 214-point rally Tuesday, the Dow Jones Industrial Average opened lower after Housing Starts data disappointed. According to the latest numbers, builders broke ground at an annual rate of 593,000 homes in May, five month lows, and well below economist estimates of 655,000. Stock index futures faltered and the Dow Jones Industrial Average opened lower on the data. However, with help from better-than-expected Industrial Production numbers (1.2 percent in May vs. .8 percent consensus) and a rebound in BP shares, the tone of trading improved into midday and trading was mixed. BP finished the day higher after announcing a $20 billion fund for spill claims as well as plans to sell assets. By the end of the day, BP was up 45 cents to $31.85. The Dow finished up 4 points and the NASDAQ gained 5.

Bullish Flow
A number of semiconductor names saw increasing call volume Wednesday. The sector has performed well lately, with the PHLX Semiconductor Index (SOX) gaining 12 percent since June 9. Among the names seeing noteworthy trading activity Wednesday was Qualcomm (QCOM). Shares finished the day down 50 cents to $35.08 and it appears that one strategist seized the weakness to enter a bullish October risk-reversal, buying 13,800 October 40 calls at 66 cents each and selling 13,800 October 30 puts at $1.01. The risk-reversal, at a 35-cent net-debit, looks like a new position and one that yields its best profits if shares of the chipmaker rally from now through the October expiration. By selling the October 30 puts, this strategist is also making the statement that they are willing buyers of the stock at $30.

Bullish order flow was also seen in Xilinx (XLNX), Micron Technology (MU), and Altera (ALTR)

Bearish Flow
Genoptix (GXDX), a Carlsbad, CA medical labs and research company, plummeted $5.69 to $17.19 and options volume hit 51X the average daily levels after the company lowered its second quarter and 2010 earnings forecast. 5,070 calls and 4,930 GXDX puts changed hands Wednesday. The action included an August 17.5 – 20 call spread, which was apparently sold at $1.30, 2000X. That is, the investor sold the 17.5s at $1.80 while buying the 20s at 50 cents, probably betting that shares will stay below $17.5 through the August expiration.

Bearish flow also picked up in Sanmina (SANM), Felco Lodging Trust (FCH), and Fannie Mae (FNM).

Index Trading
Mini-NASDAQ 100 Index (.MNX) options saw more action than usual. MNX is a cash-settled index equal to 1/10th of the NASDAQ 100 Index (.NDX), which is an index of the top 100 non-financial NASDAQ listed stocks. Some traders prefer to trade the mini index, instead of the NDX, because the premiums are cheaper with the pint-sized index. In options action Wednesday, volume in the mini index rose to 3X the average daily, with 8,470 calls and 8,900 puts traded. The top trades were in the July 187.5 puts after an investor bought 3,000 at $4.01 per contract. The premium purchase was tied to a position in NASDAQ futures, according to a source on the floor, and therefore not a straight bearish bet. It appears to be more of a volatility play on the index.

ETF Trading
CurrencyShares Japanese Yen Trust (FXY), the exchange-traded fund that tracks the yen/dollar currency pair, finished the day up 2 cents to $108.42 per share. Meanwhile, options volume rose to 4X the average daily. 12,000 puts and only 75 calls traded on the ETF. June 112 and July 113 puts saw the most action and the activity appeared to include some rolling – selling to close June 112 puts and buying to open July 113 puts. This investor appears to be extending a bearish view on the yen for an additional month. The action comes ahead of the expiration this week. After today, there are now only two trading days until the June options expire (only one day for many of the index products).