Talking Ex-Div. 07-23-2010

Cusick’s Corner
The reality of today’s EU stress test results is that we really do not know what to take from them. Everyone is taking the results with a grain of salt and will be watching for any shift, especially if the economic picture shifts negative. Next week there are a lot of stocks going ex-dividend, so those of you who have call credit spreads or covered calls in August, check to see if your stock is going “ex-div.” and then check the proximity of your strike to where the market is trading. If the option is at- or in-the-money, then you could be at greater risk of being assigned. A quick test is to look at the corresponding put. If you are short the 25 calls, look at the 25 puts and if the puts are worth .20 or less then you could be at risk of early assignment. Alright, have a good weekend and take advantage next week of all our great webinars which will be focusing on spread trading. See you Midday.

Stocks were trading higher in relatively quiet session. With no economic data to drive the trading, the focus was back on earnings Friday morning. While Ford Motor (F), Honeywell (HON), and Verizon (VZ) were among the company’s out with better-than-expected results, McDonald’s (MCD) and Amazon.com (AMZN) are seeing post-earnings weakness. The financials were also in focus after European officials released results from a series of bank stress tests. While there was some whippy trading around the headlines, released at 12:00 ET, the volatility was short-lived. The Dow Jones Industrial Average closed up 102.32 points and the NASDAQ has added 23.58.

Bullish Flow
Rambus (RMBS) hit a low of $18.04 in morning trading Friday, as investors expressed some disappointment with the chipmaker’s latest earnings release. However, RMBS battled back, still closing down 3 cents to $18.96, but 4.8 percent above session lows. Meanwhile, 20,000 options have traded in the name so far and 82 percent of the activity has been on the call side of the options chain. August 19 calls are the most actives, with 7,300 traded and one investor paying 85 cents per contract for 2000 in morning trading.

Bullish order flow was also seen in Forest Labs (FRX), Quicksilver (KWK), and Career Education (CECO).

Bearish Flow
Reliant Energy (RRI), a Houston, TX electric utility, closed up 4 cents to $4.21 and options volume is 8X the average daily, driven by buyers of August 4 puts. 5,000 changed hands. All traded on the ISE in 1000 contract blocks at 12.5 cents each and are opening customer buyers, according to ISEE data. Credit Suisse analysts cut their price target on the stock yesterday. The put buying might also be hedging activity ahead of earnings, due out early August.

Bearish flow also picked up in Range Resources (RRC), Kinross Gold (KGC), and Dean Foods (DF).

Index Trading
Russell 2000 Small Cap Index (.RUT) August 710 and 720 calls are among the most actives, with more than 37,000 traded in each. The index has battled back from early weakness and closed up 15.17 to 650.65. Meanwhile, some players were selling the August 710 – 720 call spread and collecting 30 cents to sell the 710s and buy the 720s in morning action Friday, according to a source on the exchange floor. This vertical credit spread is a low reward, high probability trade because the 710 calls are 9.5 percent out-of-the-money. The risk is high, however, because if the Russell rallies beyond 720, the max potential loss is $9.70 per spread. This strategist might feel that such a rally is unlikely over the next four weeks and is willing to risk $9.70 to make 30 cents, a ratio of more than 30-to-1.

ETF Trading
While some investors are focused on the Russell 2000 Small Cap Index (.RUT), others are focused on the iShares Russell 2000 Small Cap Fund (IWM). What’s the difference? Both will perform the same, but IWM is an exchange-traded fund and shares can be bought and sold. On the other hand, RUT is a cash index and merely a benchmark. It cannot be bought or sold. Consequently, IWM options settle for the physical delivery of shares, but RUT options exercise and assignment involves the transfer of cash. In any event, IWM closed up $1.56 to $64.98 Friday and one investor apparently initiates a substantial spread in the fund by purchasing 14,250 September 64 puts at $3.17 and selling 14,250 September 57 puts at $1.18. This spread, at a $1.99 debit per spread, is a bearish play and likely a hedge. It makes its best profits if shares fall to $57, or 12.1 percent, by the September expiration.