Shorts In Control 06-24-2010

Cusick’s Corner
The shorts continue to be in control into the Midday and now entering into the After Hours. The economic news this morning just showed that while things are not on a vertical trajectory, there is some life in the consumer and business. Not enough for the market to take off to the upside but there is some limited support at this stage of today’s market. The reality of this market is that we could be walking into some weakness both globally -- China was down overnight, and domestically -- claims were better than expected but still showing that the labor market is soft. Keep an eye on the bonds, TLT broke resistance, and the broad markets, SPY unable to break upside resistance. See you After Hours.

Weakness in overseas markets and ongoing concerns about the global economy are weighing on the stock market averages Thursday. Benchmarks traded broadly lower across Europe after the cost of insuring Greek debt hit record highs. Spain’s IBEX lost 3 percent, Germany’s DAX fell 1.4 percent, and France’s CAC 40 slid 2.4 percent. Meanwhile, the day’s domestic news showed Jobless Claims falling a better-than-expected 19,000 last week to 457,000 (vs. 460K consensus) and orders for Durable Goods down 1.1 percent in May, which was also better than the 1.3 percent decline economists had expected. However, after two days of bleak housing data and now renewed concerns about the European Debt Crisis, stocks are broadly lower and the Dow Jones Industrial Average is down 105 points midday. Overall options volume is running about the typical levels and clearly more defensive, with about 3.2 million calls and 3.9 million puts traded at 12:30 ET.

Bullish
The CBOE Volatility Index (.VIX) is up 2.56 to 29.47 and once again approaching the 30 “psyche” level. One noteworthy trade in VIX options is a VIX July 40 – August 45 call diagonal spread, apparently bought at 15 cents, 50000X. That is, it appears that an investor sold 50,000 of the July 40 calls at $1.33 apiece and bought 50,000 August 45 calls at $1.48. The trade might roll (close July and open August) a bullish position from one month to the next. Or, it might be a bet that VIX (futures) will stay below 40 through the July expiration (7/21) and then spike above 45 before the August expiration.

Wendy’s (WEN) calls are active after takeover chatter made the rounds Thursday morning. It’s unsubstantiated, but shares are up 7 cents to $4.19 on a down day for the market. Meanwhile, options volume is 6X the average daily after 3,050 calls and 140 puts traded mid-session. Short-term speculators are active in the July and August $5 calls.

Bearish
Select Sector Financial (XLF) puts are seeing heavy trading. Shares are down 23 cents to $14.28, as nervous investors wait for Congress to iron out a final draft of the regulatory reform bill. More than 500,000 puts have traded on the fund through midday. The action includes an impressive spread in the August contracts after an investor bought 70,000 August 14 puts and sold 140,000 of the August 13 puts. The strategist collected a net credit of a nickel on this 1X2 put ratio spread and will see hefty profit if shares fall to $13, or 9 percent, by the August expiration.

Trina Solar (TSL) is down 4.5 percent to $17.70 per share and put volume is picking up in the Changzhou, China specialized semiconductor maker Thursday. There doesn’t seem to be any company specific news to explain the action, but 5,300 contracts traded so far. The volume represents 7X normal for midday and compares to 740 calls. Players are active in the September 17.5 and June 15 puts. Implied volatility is up 4.5 percent to 66.5.

Unusual Volume Movers
AMD options volume is running 2.5X the usual, with 37,000 contracts traded and call volume accounting for about 87 percent of the activity.

DirecTV (DTV) options activity is running 3X the usual, with 36,000 contracts traded and call volume representing 88 percent of the volume.
Ambak (ABK) options volume is running 2X the usual, with 35,000 traded and put volume representing 90 percent of the activity.

Unusual volume is also being seen in Vivus Pharm (VVUS), Prologis (PLD), and Bed, Bath and Beyond (BBBY).

Implied Volatility Movers
BP implied volatility remains elevated, as shares fall to $29 and decade lows. Shares remain under pressure amid ongoing concerns about the political and financial impact of the Gulf spill. Options action remains brisk, with another 58,000 puts and 40,000 calls traded in the name. Meanwhile, implied volatility is up 4 percent to 75 and more than three times the levels seen prior to the disaster in late April.