Shorts in Control of Crude 09-23-2010

Cusick’s Corner
The market is doing what it typically does in the last two weeks of August, grind along in a tight range. Unless there is a major headline or a spike in interest (meaning volume), this action could continue for the next few weeks. This does not mean that one should sit back and be complacent, need to stay on your toes. While the volume is anemic, there are opportunities to keep an eye on, most notably Crude and the Euro Currency. Crude has been on the slide, breaking $75 and the October Future is trading at $73 -- the shorts at this stage are in control. This has put stress on the Energy markets as a whole, so watch Crude to see if another leg down is in the cards. The Euro has firmed up after its large sell-off and now is at that key $1.27 resistance level. The EU’s economic troubles are too many to discuss here, but there has been some promising data, the Germans are blowing away GDP forecasts, quelling some short-term concerns that there is another shoe to drop. While that risk is still present, thanks Greece, the Euro could be a good guidepost. See you After Hours.

Stocks are trading mixed on a slow news Monday. With no economic data to guide morning trading, the early focus was on the day’s stock news. BofA (BAC) is up 1 percent after Fitch ratings upgraded the bank’s preferred-stock rating to investment grade. Some mergers were announced. H-P is acquiring data storage maker 3PAR and HSBC (HBC) announced plans to buy Nedbank Group, a unit of Old Mutual. Beyond that, however, there hasn’t been much to guide the action. The Dow Jones Industrial Average is flat at 10,215 midday and the NASDAQ is down 10 points. The CBOE Volatility Index (.VIX) lost .28 to 25.21. Trading in the options market remains active, with about 3.3 million calls and 2.8 million puts traded through 12:15 ET.

Bullish
Red Hat (RHT) shares are up and options are actively traded on renewed takeover speculation. Software maker SAP is eyeing the company, according to today’s chatter. It’s unsubstantiated. Nevertheless, RHT is up 21 cents to $32.75 and options volume is 5X the average daily, with 6,280 calls and 385 puts traded in the name so far. Speculative call buyers are focused on the September 34, 35 and 36 call options.

Impressive blocks of puts traded in the iPath S&P VIX Short Term futures fund (VXX). The ETF, which is a tool for buying and selling short-term volatility, is off .41 cents to $22.43 in quiet trading Monday. One notable trade was a block of 44,000 September 20 puts at an average of 27.5 cents per contract. It was sold, according to a source on the floor. This strategist might expect volatility to stay around these levels or mover higher over the few weeks, and or they are willing buyers of VXX shares at $20 per share.

Bearish
Dollar Thrifty (DTG) adds a dime to $48.24 and an interesting trade in the name Monday morning is a put butterfly spread in the October options. In this trade, the strategist apparently sold 10,000 October 45 puts for the body of the fly and bought 5,000 of the October 40 puts and 5,000 of the October 50 puts for the wings. The same trade surfaced late Friday and might be a hedge by an arbitrage player. DTG has been in acquisition talks with Hertz. Avis has also expressed interest in the rental car company.

Select Sector Technology Fund (XLK) loses 11 cents to $21.24 and a massive put ratio backspread trades after an investor sold 10,000 September 21 puts and bought 20,000 September 18 puts, collecting 24 cents per ratio spread. This strategist might be looking for XLK to either hold above $21 or see a significant drop before the September expiration. If it holds above $21, they keep the credit. If it really tanks, they make money because they have 2X more long puts compared to short puts. The spread might also be a closing ratio spread, however.

Unusual Volume Movers
Walgreens (WAG) options volume is running 3X the usual, with 30,000 contracts traded and put volume accounting for about 75 percent of the activity.

Tenet Healthcare (THC) options activity is running 8X the usual, with 16,000 contracts traded and put volume representing 94 percent of the volume.
Whirlpool (WHR) options volume is running 3X the usual, with 14,000 traded and call volume representing 86 percent of the activity.

Unusual volume is also being seen in Conagra (CAG), Hologic (HOLX), and Dicks Sporting Goods (DKS).

Implied Volatility Movers
Dollar General (DG) implied volatility is higher, as shares see relative weakness Monday. There’s no clear news to explain the action, but shares fell 5 percent to $27.96 through midday. Options volume is 9X the average daily, with 240 calls and 615 puts traded. Meanwhile, implied volatility is up about 15 percent to 39.