Contagion is the Word of the Day 03-16-11

Cusick's Corner
Crisis, big volume, and the market finished right off the lows as we enter into Expiration. This is going to add some fuel (as I noted in the Midday) because there are a lot of strategists who were short puts (long delta & short gamma), who are now selling the underlying to hedge. This is ramping up the downside and as the time ticks, the reality of assignment nears as depressed prices are now upon the market. CPI data will also add some additional fuel on the fire, especially if the consumer sees that these inflated commodity prices are now being passed on in the shopping aisles, forcing us to either pay up or take a step back or a pause before we purchase. This could be tough on Retail. See you Midday.

Stocks fell again Wednesday on disappointing economic news and worries about problems overseas. Data was in focus early after a report showed Housing Starts plunging 22.5 percent to an annual rate of 479,000 in February. Economists were looking for a decline to 575,000. Separately, the Labor Department reported that the Producer Price Index [PPI] jumped 1.6 percent in February. Economists were expecting the gauge of wholesale inflation to increase by just .6 percent. Meanwhile, Japanese officials have ordered workers to leave the troubled nuclear plant, where radiation levels have been increasing and raising serious concerns about the potential impact to the population and activity within the world's third largest economy. Japan is already reeling from last week's devastating earthquake and tsunami. Tokyo's Nikkei was able to rebound 5.7 percent overnight, but futures point to losses when trading resumes Thursday. Stock market averages were broadly lower across Europe and fell on Wall Street as well. At the closing bell, the Dow Jones Industrial Average had given up 242 points and the tech-heavy NASDAQ lost 50.5. Contagion is the word of the day.

Bullish
Peabody Energy (BTU) bucked the bearish trend. Action in some of the coal names is heating up because the nuke crisis is likely to shift some resources away from the development of future nuclear power plants and to other means of power generation, like coal-fired plants. BTU, the St. Louis-based coal producer, finished the day up $2.54 to $67.67 and options volume jumped to 3.5X the average daily levels. 36,000 calls and 17,000 puts traded in the name. March 70 calls, which have just two days of life remaining after today, were the most actives. Some investors might have been closing positions on the strength in the stock. However, April 65, 70 and 80 call options were actively traded as well and the buying in these calls seems to reflect expectations for additional gains in BTU in the weeks ahead.

Bullish trading was also seen in Baidu.com (BIDU), Lubrizol (LZ), and Peet's Coffee and Tea (PEET).

Bearish
YRC Worldwide (YRCW) had a rough day today. Shares fell 28 percent to $1.47 and have been reeling since a filing Monday indicated that the company missed a deadline for restructuring debt and was again in danger of bankruptcy (Kansas City Business Journal). Options volume in the Overland Park, KS trucking company hit 2.5X the average daily. 22,000 puts and 4,000 calls traded in the name Wednesday. April 2.5 puts were the most actives, 14,400 changed hands, as some investors were likely buying puts on the view shares might continue falling in the weeks ahead.
Bearish flow also surfaced in Avon Products (AVP), Exelon (EXC), and Marriott (MAR).

Index Trading
Volume is surging in the index market due to the volatility and the options expiration. Since many index options settle using Friday morning prices, the last day to trade the contracts is on Thursday. So, volume often picks up mid-week before the expiration. 1.20 million calls and 1.60 million puts traded on the S&P 500 Index (.SPX) and other cash indexes today, which is about double the recent average daily, according to Trade Alert data. SPX puts saw heavy trading. 1.2 million contracts changed hands. Meanwhile, the CBOE Volatility Index (.VIX), which tracks the expected volatility priced into S&P 500 Index options, jumped beyond 30 for the first time since July. VIX finished the day up 5.08 to 29.40. Heavy SPX put activity and a high VIX are signs that demand for portfolio protection is on the rise. Investors are nervous and buying downside portfolio protection.

ETF Action
The S&P 500 Index (.SPX) saw heavy trading and so did the SPDR 500 Trust (SPY). The so-called “SPYders” is the exchange-traded fund that holds the same stocks as the S&P 500. Shares finished the day down $2.38 to $126.17. Options volume included 3.6 million puts and 1.6 million calls, which is more than double the average daily volume for the ETF. March 126 puts, which are now just 17 cents out-of-the-money and expire Saturday, were the most actives. 324,375 traded. March 127 puts, March 128 calls, and March 130 calls saw heavy trading as well. Players are active in these short-term contracts and taking positions (adjusting and closing existing positions) in reaction to the extreme volatility seen in the S&P 500 over the past few days. SPY is down 3.6 percent on the week.