Capital Looking for a Home 03-07-2011

Cusick's Corner
The market held the lows and bounced into the After Hours, aided by lower crude and a selloff in the fixed income space. Capital needs a home and “Risk” assets are still the place to be. I have been professing protection over the last few weeks, but those who are long and want to add to their holdings without adding principle risk of buying stock, ratio call spreads (coupled with the existing long stock position) could be the answer. For this ratio call example with stock, one in-the-money call is purchased for every two out-of-the-money calls sold against the existing long stock position. The core principle of implementing this strategy is that we are trying to match a stock position (whether a small loser or stuck in a consolidation waiting for the next breakout) with an options position while not “adding” further capital risk. Click HERE to access a video presentation on this strategy idea.

Stocks finished broadly lower on ongoing worries about the potential impact of rapidly rising oil prices on the global economy. April WTI crude hit a high of $106.95 early Monday and was recently up 53 cents to $104.95 a barrel after forces loyal to Libyan leader Muammar Gadhafi battled with rebels near an important oil port in Libya. Although crude moved well off session highs, the recent spike in oil is raising concerns about the potential economic fallout from higher energy prices, which will also impact corporate earnings. Meanwhile, the only economic stat of the day was a report on Consumer Credit released Monday afternoon. It showed an increase to $5 billion in January, from $4.1 billion the month before ($3.3 billion consensus). The data didn't get much attention. Instead, the focus is on oil and, with crude settling well off session highs, the Dow Jones Industrial Average was able to close off the day's lows. At the end of the day, the Dow was down 80 points and 48 points from its worse levels. The tech-heavy NASDAQ lost 39.

Bullish
Delta Airlines (DAL) with increasing options action. Shares of the airliner saw a late-day lift and added 18 cents to $10.09 Monday. Options volume hit 3X the recent average daily levels. 42,000 calls and 9,615 puts traded in Delta. The top trades were two blocks (2,000 and 3,000) totaling 5,000 January 10 puts traded at $1.92 and $1.93 per contract and are possibly liquidating trades. Beyond that, most of the action was on the call side of the options chain and included heavy trading in June 11 and September 12 calls. Some players are possibly taking position in out-of-the-money calls to play the stock for a potential rebound in the months ahead. Concerns about higher oil prices and rising jet fuel costs have DAL shares down nearly 9 percent since mid-February. Shares have fallen nearly 30 percent since late-November.
Bullish trading was also seen in AMR, Focus Media (FMCN), and Western Digital (WDC).

Bearish
Applied Materials (AMAT) saw a surge in put activity Monday. Many semiconductor and chip equipment stocks were relatively weak today after Ciena (CIEN) reported a wider quarterly loss on increasing costs. AMAT gave up 77 cents to $15.96 and 41,000 puts traded in the name. The volume is 9X the typical put activity and 10X the day's call volume. April 15 puts, which are 96 cents out-of-the-money, were the most actives. 36,600 traded, as some investors appeared to be opening new positions in the contract on concerns about additional weakness in AMAT shares between now and the April expiration (39 days).
Bearish flow also surfaced in Vishay Intertechnology (VSH), ARM Holdings (ARMH), and Temple Inland (TIN).

Index Trading
Overall options volume in the index market was relatively light, as there are no signs of panic in the market so far. 569,000 calls and 511,000 puts traded across the S&P 500 Index (.SPX) and other cash indexes, which is only 90 percent the 22-day average, according to Trade Alert data. One index that did see increasing volume is the Dow Jones Industrial Index. Trading under the ticker DJX, the index tracks the Dow Jones Industrial Average, divided by 100. Therefore, with the Dow trading at 12,090, the smaller index finished at 120.90. Meanwhile, options volume in the DJX was 2.5X the average daily, with 9,490 puts and 7,900 calls traded. March 110 and 107 puts were the most actives.

ETF Action
Semiconductor HOLDRS (SMH) lost $1.02 to $35.04 on a rough day for chip stocks after Ciena reported disappointing earnings. Volume in the semi ETF hit 5X the average daily. 60,000 puts traded in the SMH, which is 5X the norm and 6X the day's call volume. Not all of the put flow was bearish, however. The top trade of the day was a block of 27,300 May 35 puts at $1.45 per contract. It was sold, according to a source on the exchange floor, and appears to be a new position. If so, it might be bet that shares will hold above $35 through the May expiration. 30,600 contracts traded on the day.