Volatility Has Been Static 08-19-2010

Cusick’s Corner
Barring a headline overnight (or early in tomorrow’s session), all that we really have is equity options expiration, which at this stage should not add too much volatility unless the above happens. Bond yields did rebound into the After Hours which seemed to have helped equities close off their worst levels. Volatility at this stage has been static, VIX +1.85, definitely caught in a range, so it looks like the market is ok with the grinding range that we have been in, SPX 1070-1095. Remember -- those who had August positions in European-style options, like the cash SPX, the settlement price is established by all the individual opening prints (each stock’s opening price in the basket) that make up the index. See you Midday.

The table was set for early losses on Wall Street Thursday after the Labor Department reported that weekly jobless claims increased by 12,000 to 500,000 in the period ended August 14. Economists were looking for a decline of about 13,000. The early morning slide gathered additional momentum at 10:00 am ET after the Philadelphia Fed Survey of manufacturing activity showed an unexpected contraction of –7.7 in August. Economists had expected a reading of +7.5. With not much other news to guide the market, the Dow Jones Industrial Average fell on the data and never bounced back. The Dow finished the day down 145 points and 54 points off session lows. The NASDAQ lost 36.75.

Bullish Flow
BMC Software (BMC) saw bullish flow for a second time this week. Shares finished up $1.46 to $37.59 amid relative strength in the software names after Intel (INTC) made a bid for security software maker McAfee (MFE). Meanwhile, BMC options volume rose to 6X the average daily, with 6,400 calls and 740 puts traded on the day. September 37 calls were the most actives. 2,460 contracts traded and 87 percent of the volume traded through at the Ask price, suggesting buyers were dominating the action. November 40, September 38, and September 40 calls saw interest as well. BMC was also the subject of bullish order flow Tuesday, when 3,600 calls and 290 puts traded on the stock.

Bullish flow was also detected in Supervalue (SVU), Ericsson (ERIC), and Gannett (GCI).

Bearish Flow
Intel (INTC) was the biggest loser in the Dow Jones Industrial Average after the chipmaker announced plans to buy McAfee. Investors didn’t seem very pleased with the news, as Intel shares fell 3.5 percent to $18.90. Meanwhile, in the options market, Intel options volume rose to 3X the average daily with 114,000 calls and 124,000 puts traded Thursday. The top trade was a September 19 – 22 put spread bought at $2.33, 5350X. The spread appears to be a roll down in strike prices, or closing out a winning position in the in-the-money puts at 22 strike to open a new similar bearish position in the at-the-money September 19 puts.

Bearish flow also picked up in Newell Rubbermaid (NWL), Emulex (ELX), and Louisiana Pacific (LPX).

Index Trading
The CBOE Volatility Index (.VIX) saw interesting trading activity Thursday. The index gained 1.85 to 26.44 and one trade late in the day was a buyer of 25,000 September 45 calls at 45 cents per contract. Earlier in the day, a block of 13,000 September 32.5 calls traded at $1.80. It was part of a butterfly spread, where the investor sold the contract and also bought 6,500 September 42.5 calls and 6,500 September 25 calls. Like the straight call buy, this fly is a bullish play on the VIX, as it makes its best profits if the index settles at 32.5 at the September expiration. At the end of the day, 151,000 calls and 48,000 puts had traded on the volatility index.

ETF Trading
Options activity picked up in a number of the exchange-traded funds due to the market volatility Thursday and heading into the options expiration. Tomorrow is the last day to trade August options. 3.6 million puts and 2.2 million calls traded across all ETFs. Defensive trading was seen, as some big institutional players bought large blocks of puts on a variety of different funds. For example, Thursday’s action included a buyer of 50,000 January 19 puts on the Consumer Discretionary Select Sector Fund (XLY). Another player bought 25,000 September 40 puts on the iShares Emerging Markets Fund (EEM). A December 14 – 10 put spread on the Financial Select Sector Fund (XLF) traded 26000X. Also on Thursday, one player initiated a Sep 52 – Jan 47 put diagonal spread on the iShares MSCI EAFE Fund (EFA), 20,700X. All of these big trades are possibly designed to hedge stock portfolios and help reduce risk should the volatility continue in the weeks ahead.