Oil Falls & Market Bounces Amid Rumors Gadhafi Shot 02-24-2011

Cusick's Corner
oXSocialsphere was white hot with discussion on the rumored news of Gadhafi being shot, which took $2 out of the Crude and the market rallied to just below breakeven. As I mentioned in the Midday, the bid seemed to be lurking around and bit into the After Hours. The headline risk is still very real in this market but the reality is that building some cash at this stage, potentially taking profits for opportunities in the next few sessions might be a prudent idea. Some pundits may say that the markets are setting up to take off again, this does have some technical merit, but the reality is that volatility is not going away and when volatility is on the rise, being able to be nimble is key. I have been discussing a few strategies over the past few Corners -- using options to replace stock positions (LEAPS), selling options to eventually own stock (short puts) or implementing spread strategies (mitigating premium and volatility risk) – these all leave cash in the coffers and help you to be nimble. See you Midday.

Stocks moved broadly lower Thursday morning, but finished mixed following a dramatic reversal in crude oil prices. The focus was back on oil before the bell on Wall Street after crude bubbled beyond $103 a barrel amid supplies fears due to escalating unrest in North Africa and the Middle East. Yet, prices fell in afternoon trading after the Saudis pledged to pump more supplies and with Reuters reporting unconfirmed rumors that Libyan leader Muammar Gadhafi had been shot. Aggressive selling in crude surfaced after midday and continues late Thursday. April WTI was recently down $2.25 to $95.85 a barrel. Meanwhile, the day's domestic news included a better than expected reading on weekly jobless claims (391K vs. 410K consensus) and an in-line reading on Durable Goods (2.7 percent). A third report released later showed New Home Sales at an annual rate of 284K in January, which was down from 325K from the month before and much less than the 310K that economists had expected. At the end of the day, it was oil that drove trade, not economic news, and the Dow Jones Industrial Average finished the day down 37 points, but 85 points off session lows. The tech-heavy NASDAQ added 14.9.

Bullish
An interesting spread traded in UAL Corp. (UAL) Thursday morning. Shares of the airliner were extending a recent drop and trading at $23.18 amid concerns about the impact of higher crude price and rising jet fuel costs. In the spread, the strategist bought 1,900 April 22 calls at $2.45 and sold 5,700 April 27 calls at 50 cents. They paid 95 cents for this 1X3 call ratio spread and are possibly looking for the stock to move towards $27 by the April expiration. It's off to a good start. The stock finished the day up $1.33 to $24.11 and 4 percent above the levels seen when the trade was initiated. A reversal in crude oil prices probably helped fuel the rally in UAL Thursday afternoon.

Bullish trading was also seen in Petrohawk (HK), Ensco (ESV), and Hanesbrands (HBI).

Bearish
Waste Management (WM) lost 47 cents to $36.79 and options volume in the Houston-based company hit 3X the average daily. 12,000 puts and 2,365 calls traded in the name. July 32 puts, which are 13 percent out-of-the-money, were the most actives. 5,125 contracts traded. In addition, 72 percent traded at the ask and open interest is 3,527. So, it looks like some investors might be buying to open new positions in these OTM puts. April 31, July 30 and July 31 puts saw interest as well. There was no news to explain the heightened activity. WM is down 3.3 percent over the past three days and some nervous shareholders might be initiating the put purchases to hedge stock.

Bearish flow also surfaced in Gap Stores (GPS), H&R Block (HRB), and Principal Financial Group (PFG).

Index Trading
Options action slowed a bit in the index market. 566,000 calls and 706,000 puts traded across the S&P 500 Index (.SPX) and other cash indexes, which is typical volume for the index pits these days. The S&P 500 lost 1.30 to 1,306.10. Meanwhile, the CBOE Volatility Index (.VIX), which tracks the expected volatility priced in SPX options, hit a high of 22.71 midday, but lost .81 to 21.32 on the session. Options volume in VIX included 325,000 calls and 146,000 puts. March 25, 27.5, 32.5 and 35 calls were the most active VIX options, as some investors were probably buying upside calls on the index amid concerns about increasing levels of volatility in the near term. VIX March options expire in 19 days.

ETF Action
US Oil Fund (USO) saw a third day of heavy trading. USO, which is the exchange-traded fund that tracks crude through futures contracts, rallied 9.5 percent Tuesday and Wednesday, but lost 83 cents to $38.97 Thursday. In options action, 217,000 calls and 87,000 puts traded in the USO Tuesday. Another 332,000 calls and 166,000 puts traded Wednesday. Today, volume was heavy again. 262,000 calls and 144,000 puts traded on the oil fund. April 44 calls, which traded 20,125X, were the most actives. In addition, 74 percent traded at the ask, indicating that call buyers were dominating the action and possibly looking for USO to bubble north of $44 per share by the April expiration.