Central Banks Intervene to Weaken Yen 03-18-2011

Cusick's Corner
The Japanese yen set a record high against the dollar yesterday. The Federal Reserve and the other G7 central banks took action – they coordinated plans to intervene in the currency markets to help weaken the yen in order to reverse part of the rally that has happened since the earthquake. A stronger yen means that it will be more difficult for Japanese exports to compete. These same exports will be a major driver in Japan's economy and will help them with their recovery after this devastating disaster. The options volume on the Currencyshares Japanese Yen Trust (FXY) is almost 3X the average daily today. FXY is down $3.13 to $122.03 after officials agreed to intervene in the currency markets (see ETF Trading). We are now heading into the final hours of March Expiration – check your remaining expiring positions.

Stocks are broadly higher on options expiration Friday. With no economic data to guide the action, a lot of the focus today is on overseas events. The Japanese yen is trading sharply lower after G-7 members agreed on currency intervention. The yen had been rallying since last week's devastating earthquake and tsunami. A stronger currency hurts the export-driven Japanese economy and therefore officials agreed to take steps to slow its rise. Meanwhile, a ceasefire in Libya helped send crude oil prices down 29 cents to $101.13 a barrel. JP Morgan (JPM) is the best gainer in the Dow Jones Industrial Average, up 2.9 percent, on news the bank will increase its quarterly dividend. The Dow Jones Industrial Average is up 118 points midday, the tech-heavy NASDAQ has added 13 and the CBOE Volatility Index (.VIX) gave back 2.39 to 23.98. Trading in the options market is active due to the options expiration, with 6.3 million calls and 5.8 million puts traded through 12:50pm ET.

Bullish Flow
Cisco Systems (CSCO) is trading up 22 cents to $17.22 after the networking giant announced plans to pay a 6-cent quarterly dividend. Shares hit a morning high of $17.42 on the news, but have been drifting lower since that time. CSCO is down 22 percent since earnings were reported on February 9. Some of the day's options action seems to reflect expectations for a rebound, however, as 225,000 calls and 146,000 puts have traded in Cisco so far today. January 17.5 calls, which are now 28 cents out of the money, are the most actives. More than 77,000 have traded. Some investors might be taking positions in January 17.5 calls as a way to lock in the right to buy (or call) Cisco shares at $17.50 through the January 2012 expiration.

Emulex (ELX) is down 2 cents to $9.91 and in the midst of a one-month 16 percent skid. Meanwhile, today's options volume includes more than 6,000 calls and only 13 puts through midday. January 10 calls, which are nine cents out-of-the-money, are the most actives. More than 4,000 traded and it looks like investors are paying $1.45 and $1.50 to open new positions. April and July 10 calls are seeing interest well. No news on the computer component manufacturer today. Some investors might be buying $10 calls on hopes for a rebound in the months ahead.

Bearish Flow
Waste Management (WM) puts are actively traded Friday. Shares are up 17 cents to $36.40 and some investors are focused on the July 35s and 30s. The July 35 puts are the most actives. 4,300 traded, including a 1,395-contract block at the $1.40 asking price. In fact, with 96 percent of the action trading at the offer and open interest of just 2,728, it looks like put buyers are taking new positions in the waste management company. July 30 puts are seeing similar action. No recent news on the ticker today. Earnings were last reported on 2/17. Shares are down 4.6 percent since that time.

Currencyshares Japanese Yen Trust (FXY) is under pressure today. Shares, which track the yen and US dollar currency pair, are down $3.13 to $122.03 after officials agreed to intervene in the currency markets and slow the recent rise in the Japanese yen. Options volume in the trust is almost 3X the average daily, 13,000 puts and 3,500 calls traded so far. The expiring March 124 and 125 puts are the most actives. Some investors are likely liquidating positions now that these puts are in-the-money and expire after today.

Unusual Volume
Cisco Systems (CSCO) options volume is running 2X the (22-day) average, with 378,000 contracts traded and call volume accounting for 61 percent of the volume.

Lorillard (LO) options volume is 3.5X the average daily, with 88,000 contracts traded and put volume representing for 62 percent of the activity.

Prologis (PLD) options volume is running 60X the average daily, with 117,000 contracts traded and call volume accounting for 50 percent of the activity.

Increasing options activity is also being seen in Nike (NKE), Regions Financial (RF), and Riverbed Tech (RVBD).

Implied Volatility Mover
Lorillard (LO) shares are rallying and implied volatility is falling. LO gained $7.46 to $86.24 after an FDA panel said that menthol should be removed from the market due to public health risks. However, it isn't clear if the FDA will follow on the recommendation and, if so, it could take years to implement. Lorillard, the cigarette maker with 90 percent revenues from menthol products, is rallying and options volume is running 3.5X the average daily. Implied volatility is down 21 percent to 34.5 percent now that the panel decision has been announced.