Puts are Your Friend 03-10-11

Cusick's Corner
Shots fired in Saudi Arabia, the market finished at its worst levels, and for the first time all year this market is looking truly distressed. This action is exactly why I have been discussing protection and spread trading. Mitigating risk tactics are essential, especially when volatility enters the market. Risk trade (equities) is lightening up and if tomorrow's Retail Sales data comes in weak, ex-autos, the growth story will come under more scrutiny. This is not a time to stick your head in the sand waiting for the bid to reappear. This is the time to proactively review both your portfolio and trading plan, potentially making adjustments, so that emotions do not completely take over. For example, during your portfolio review, you determine that you are rather heavy in Retail stocks. If you are concerned that we are entering a weak phase, instead of buying puts on each of the stocks in your portfolio, could purchase an ETF put or Futures put to hedge a percentage of your portfolio. See you Midday.

It was a volatile session on Wall Street, as disappointing economic news and negative headlines from overseas conspired to send stocks sharply lower Thursday. Data was in focus early after the Labor Department reported that jobless claims increased by 26,000 to 397,000 in the week ended March 5. Economists were looking for an increase of 11,000. A separate report showed the US Trade Balance widening to $46.3 billion in January, form $40.3 billion in December and more than the $41.5 billion that had been expected. Meanwhile, European stock market averages finished lower after Moody's cut Spain's credit rating. The euro fell, as did dollar-denominated oil and gold. However, crude oil caught a bid later in the day on reports Saudi's had fired on protestors. Crude oil is down $2.02 to $102.26, but more than $2 off session lows. Still, Exxon (XOM) and Chevron (CVX) were among the Dow's biggest losers. McDonald's (MCD) was the sole winner in the industrial average and the Dow lost 228 points. The tech-heavy NASDAQ gave up 50.7 points.

Bullish
Starbuck's (SBUX) shares bucked the bearish trend. SBUX set fresh 52-week highs and settled the day up $3.43 to $37.97 after announcing a new partnership with Green Mountain Coffee Roasters (GMCR). Investors seemed to like the news. Not only did shares of Starbuck's and GMCR rally, but total volume in SBUX hit 7X the average daily. 44,000 calls and 31,000 puts traded in the name. April 38 calls, which are now at-the-money after today's move, were the most actives. 7,120 traded. April 38 puts, April 45 calls, and March 38 calls saw heavy trading as well.

Bullish trading was also seen in Green Mountain Coffee Roasters (GMCR), Sprint Nextel (S), and H&R Block (HRB).

Bearish
Cemex (CX), a Mexican cement company, lost 8 cents to $8.60 and options volume hit 4X the average daily. 24,000 puts and 6,600 calls traded in CX today. January $5 options (that expire in 2013) were the most actives. 5000 traded. The long-dated Jan2013 7.5 puts saw interest, as did the April 9 and July 7 puts. Note that all of these puts are out-of-the-money. Meanwhile, implied volatility moved up 10 percent to 45. Taken together, the strong interest in OTM puts and increasing implied vols seems to reflect investor concern about a possible move lower in Cemex shares in the weeks/months ahead.

Bearish flow also surfaced in Jackson Hewitt (JTX), Frontier Communications (FTR), and General Growth Properties (GGP).

Index Trading
Trading in the index market had been quiet this week. Until Thursday! 857,000 calls and 760,000 puts traded across the S&P 500 Index (.SPX) and other cash indexes, which is 1.3X the recent average daily volume, according to Trade Alert data. SPX tumbled 24.91 to 1,295.11 and the CBOE Volatility Index (.VIX) gained 1.66 to 21.88. VIX March 20 puts, which expire Wednesday, were the most actives. 48,000 traded. VIX March 22.5, March 25 and May 30 calls were among the most actives as well. Heavy trading in VIX out-of-the-money calls is sometimes a sign that investors are worried about the short-term outlook and are bracing for higher levels of future market volatility.

ETF Action
A number of exchange-traded funds saw increasing put activity today. 5.8 million puts and 3.3 million calls traded across all the ETFS. In the SPDR 500 Trust (SPY), which is the exchange-traded fund that holds all of the S&P 500 stocks, finished the day down $2.45 to $129.84 and volume in the ETF was 1.3 million calls and 2.3 million puts. A number of the SPDR sector funds saw increasing put volume as well. Collectively, these nine funds hold the S&P 500 stocks grouped by sector. The Energy (XLE), Technology (XLK), and Industrials (XLI) were among the funds seeing increasing put activity, as some investors were probably scrambling to buy puts on these funds to hedge exposure to specific industry groups and sectors.