Cusick's Corner

The market held up into the close, with the S&Ps finishing off the highs and below the resistance level that I wrote about last week, 1325. The Crude market, USO, finished below $97.50 which was a level that could possibly put more pressure on the Crude longs, could potentially see $92, especially if the overnight action gets dicey. We are in overbought territory and once the potential Greek solution catalyst is in the rearview mirror until June at least, traders with a nice return over the last month may take some profits. I am seeing this kind of action in the commodities and starting to wonder if this could spill into the equities, at least for the short-term. Tomorrow I will have a discussion on spread trading in a low volatility environment. See you Midday.
Stock market averages rallied at the open and are holding the gains late-Wednesday. The underlying tone of trading was bullish on the first day of February after strong manufacturing data in China and Europe raised hopes that the global economy is weathering the storm caused by ongoing European debt problems. Stock market averages saw solid gains across the Eurozone, led by a 2.4 percent rally in Germany's DAX. In the US, the domestic economic news was mixed. A report from ADP released before the opening bell on Wall Street showed the economy adding 170,000 new jobs in January, which was about 30,000 less-than-expected. The latest ISM index of manufacturing activity was released later and rose 1 point to 54.1 in January, but that was .4 less than expected. However, Factory Orders increased by 1.5 percent in December and 1.1 percent more than economists had predicted. The data didn't seem to have much market impact, as the Dow Jones Industrial Average was already sporting a triple digit gain before the ISM and Factory Orders reports were released. With an hour left to trade, the Dow Jones Industrial Average is now up 127 points and 25 points from its best levels.

Bank of America (BAC) is up 3.9 percent to $7.39 and the best gainer in the Dow Jones Industrial Average. BAC had a good month in January and has now rallied 32.9 percent year-to-date. One large player in the options market seems to be anticipating additional gains for shares of the bank and bought a hefty block of call options on the stock. In midday trading Wednesday, 62,500 April 8 calls were bought on Bank of America for 37 cents per contract. The block probably adds to a position opened yesterday. As noted in Tuesday's wrap, an investor bought 62,500 April 8 calls on the bank yesterday for 28 cents. Shares have since added 4 percent and the investor is paying 32 percent more today for the same call options. This large call buyer is possibly looking to accumulate a sizeable position in BofA, but rather than buying shares outright today, they are buying call options - which lock in the right to buy or "call" the stock at $8 per share through mid-April.
Bullish trading was also seen in Corinthian Colleges (COCO), Impax Labs (IPXL), and US Steel (X).

A hefty three-legged trade surfaces in Amylin Pharmaceuticals (AMLN) Wednesday afternoon. Shares are up $1.25 to $15.49 and are extending a rally that started Monday after the FDA approved the company's diabetes drug Bydureon. Shares have surged 27.6 percent so far this week. One investor might be looking to protect recent gains and initiated a massively bearish spread on the stock. In this advanced position, 10,000 March 19 calls were sold on the stock at 47 cents, 10,000 March 15 puts bought for $1.14, and 20,000 March 12 puts sold for 29 cents. In essence, March 19 calls were sold on the stock to help finance a Mar 12 - 15 (2X1) put ratio spread. A 9-cent debit was paid for the three-way and the position will offer its best payoff if shares fall to $12, or 22.5 percent, through the May expiration. There is additional risk to the downside because only half of the Mar 12 puts, which were sold, are covered by the Mar 15s. The debit is lost if shares hold above $15 and all of the options expire worthless. There's also additional risk to the upside from selling Mar 19 calls.
Bearish trading was also seen in ATP Oil and Gas (ATPG), Murphy (MUR), and Sony (SNE).
Index Trading

CBOE Volatility Index (.VIX) is down .98 to 18.46 and trying to hold above the 2012 closing low of 18.28 set on January 20. One player in the options market seems to be anticipating a rebound in the index through mid-March and initiated a March 20 - 27 - 35 call butterfly on the index for $1.225, 10000X. In this advanced options play, 20000 March 27 calls were sold on the VIX for the body of the fly. The same strategist also bought 10,000 March 20 calls and bought 10,000 March 35 calls for the wings. Since the body of the fly, or the sweet spot of the spread, is at 27, the spread has a bullish bias. To be specific, the position will offer its best payout if the index settles at 27 at the March expiration.
ETF Action

In the midday report, we noted that one investor sold 10,000 February 55 puts on SPDR Retail Trust (XRT) at 74 cents and sold 10,000 February 56 calls at 70 cents. Since volume exceeds the open interest in both contracts, the position looks like a new position. It's a so-called strangle write. We later found out that the position was related to a pairs strategy, in which the investor bought 10,000 Feb 53 puts on the iShares MSCI Fund (EFA) for 93 cents and 10,000 February 53 calls for 90 cents. EFA is up 93 cents to $53.07. In essence, the strategist was selling XRT strangles to buy EFA straddles. It appears to be a volatility play - and possibly a view that EFA, which is a fund that holds shares of companies from Europe, the Far East, and Australia, will see higher levels of volatility relative to domestic retailing names. It's a short-term play because February options expire in 16 days.