China Orders Stress Tests 08-04-2010

Cusick’s Corner
We were reminded today that this market is still sensitive to headline risk – there was a report that the Chinese government ordered its banks to stress test a 60% loss in property value, the market immediately pulled back. This was a short lived pullback that is resulting in tighter trading ranges going into the afternoon. The After Hours trade is grinding it out, both sides, shorts and longs, are shoring up some risk before we go into the end-of-week data crunch that culminates with the employment report. We need to stay aware of position sizing and keep tight risk controls. This is in an effort to preserve capital and have some powder dry when a more sustained move comes into play. See you After Hours.

Trading is slow and the major averages are sporting modest gains following better-than-expected economic data Wednesday. The unemployment situation was in focus early after ADP reported that the US economy added 42,000 private sector jobs in July; which isn’t great but better than the 19,000 in June and also better than the 25,000 increase that economists had predicted. A separate report released at 10:00 ET showed the ISM Services Index showed improvement to 54.3 in July, from 53.8 in June and ahead of economist estimates of 53.0. The better-than-expected economic data seemed to help keep a floor under the market on an otherwise slow news day. The Dow Jones Industrial Average is up 50 points and the NASDAQ has added 16.5 through midday. The CBOE Volatility Index (.VIX) is off .15 to 22.48. Trading volume is running about typical levels, with about 3.2 million calls and 2.7 million puts traded through 11:30 ET.

Bullish
The PowerShares Bullish Dollar Index Fund (UUP), which tracks the performance of the buck against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc, is up 16 cents to $23.58 and is trying to battle back from a two-month 9.4 percent slide. At least one options strategist seems to be looking for a rally in the months ahead. A block of 10,000 December 24 calls traded at 39 cents per contract on the ISE and was an opening customer buyer, according to data from the exchange. About 20,000 calls and 1,190 puts have traded on the fund through midday.

Homebuilder Lennar (LEN) shares are off 8 cents to $14.54 and options volume is running 2X the average daily, driven by apparent sellers of September 14 put options. The top trade is a block of 8,469 contracts on the 63-cent bid. Open interest is only 668 contracts and so this looks like an opening put writer, possibly willing to buy the stock if it falls back to $14 or less through the September expiration. The bullish trade comes the same day that homebuilder Pulte Home (PHM) posted its first profit in almost 4 years.

Bearish
The top options trade so far today is in the CBOE Volatility Index (.VIX). The index, which tracks the expected volatility priced into S&P 500 Index (.SPX), options, is up .08 to 22.71, as the S&P 500 drifts quietly 2.6 points higher. The big options trade in question is in the VIX September 45 calls that traded at 50 cents when the bid-ask spread was 50 to 55 cents. The action looks like a new position, as open interest is less than 20,000. If so, this strategist is possibly selling a large block of calls on the view that volatility will remain low through the September expiration. It’s a risky play because, should VIX spike higher, the strategist could be on the hook to pay the difference, in cash, between the actual value of the VIX minus the 45 strike.

Virgin Media (VMED) is seeing interest in its longer-term January 2012 put options. The focus is on the 10 line, where nearly 12,000 have traded. Most traded on the CBOE, where a source on the exchange floor tells us one investor bought 10,600 contracts at 75 cents each. It looks like hedging activity. Shares are down 40 cents to $21.24 and so the $10 puts are more than 50 percent out-of-the-money.

Unusual Volume Movers
Dendreon (DNDN) options volume is running 3X the usual, with 67,000 contracts traded and call volume accounting for about 55 percent of the activity.

Priceline (PCLN) options activity is running 6.5X the usual, with 51,000 contracts traded and put volume representing 59 percent of the volume.
Utilities Select Sector Fund (XLU) options volume is running 3.5X the usual, with 27,000 traded and put volume representing 92 percent of the activity.

Unusual volume is also being seen in Baker Hughes (BHI), Hartford Financial (HIG), and STEC.

Implied Volatility Movers
Procter & Gamble (PG) implied volatility is easing after shares tumbled on earnings news the day before. PG is up 35 cents to $60.29 and some premium selling is being seen, including a seller of 5,000 August 57.5 put – August 60 call strangles at $1.15 each. This strategist might see PG staying in a range between those two strikes over the next two and half week. Implied volatility in PG is falling 5 percent to 17.5, and now off about 17 percent on the week.