Cusick's Corner 02-22-2012

The push did not happen but there was also little change in the downside pressure. We did see the majority of offensive sectors, XLF/XLI/XLY, grinding back to the downside. The pressure is building right at resistance levels. I have to jump on a flight but will be watching the overnight action to give a flag for Midday trade.
Stock market averages finished with modest losses on a day of slow trading Wednesday. Lackluster action overseas set the table for cautious early trading on Wall Street. Although EU officials approved a bailout of Greece earlier this week, uncertainty remains about the region's economic outlook after data released Wednesday showed European services and manufacturing shrinking in February. Germany's DAX lost .9 percent and France's CAC 40 gave up .5 percent today. The domestic economic news included one sole economic stat. Existing Home Sales were up to an annual rate of 4.57 million last month, which marked an improvement from 4.38 million in December, but below expectations of 4.63 million. On the earnings front, Dell Computer (DELL) lost 5.8 percent on an earnings miss and Walmart (WMT) fell for a second day after the world's largest retailer reported earnings Tuesday. The stock has since suffered a two-day 6.7 percent losing skid. Crude oil gave back 26 cents, but some investors are growing worried about the economic impact of higher energy costs, as prices remain north of $106 per barrel. Gold was flat at midday, but surged late and was recently up $20.5 to $1779 an ounce. Meanwhile, the Dow Jones Industrial Average traded in a narrow 63-point range and lost 27 points on the day. The NASDAQ gave up 15.4 points.


Pfizer (PFE) added 14 cents to $21.36 and was one of 10 Dow stocks to finish with gains Tuesday. Options on the drug-maker were actively traded. 47,000 calls and 26,000 puts traded in Pfizer's options today. April 22 calls, which are 3 percent out-of-the-money and expiring in 58 days, were the most actives. 23,338 traded, including a 16,000-contract block for 30 cents when the market was 29 to 30 cents, which might be an opening buyer taking a bullish position in the stock. Earlier in the day, one or more investors were active in January 17.5 puts and 22.5 calls. For example, the Jan 17.5 - 22.5 bullish risk-reversal on PFE traded for 12 cents, 1504X on ISE. Data from the exchange reports that puts were being sold to buy calls - 3000X total. At the same time, overall levels of implied volatility in PFE options fell 3 percent to new 52-week lows of less than 16. The stock is up 15.9 percent during the past few months. The high volume in April 22 calls and the interest in the Jan 17.5 - 22.5 bullish risk-reversal seem to reflect expectations for additional gains in Pfizer shares in the months ahead.

Bullish trading was also seen in Xerox (XRX), Fuel Cell (FCEL), and Clorox (CLX).


Safeway (SWY) might be worth watching Thursday morning. The grocery chain is due to report earnings before the bell. Shares were up 16 cents to $22.67 in active trading of 9.3 million shares on Wednesday ahead of the news. Options volume was 5X the daily average. 22,000 puts and 4,800 calls traded in SWY today. The top trade was an 8000-contract block of April 20 puts on the 20-cent bid. The trade coincided with 4,000 April 22 puts for 80 cents and appears to be part of an April 22 - 20 (1X2) put ratio spread for a 40-cent debit. If so, it's a bearish play that offers its best payoff is the stock falls to $20 through the April expiration, or 11.8 percent over the next 58 days. The debit (plus transaction costs) is at risk if shares hold above $22 and the position is held to expiration. Ratio put spread traders also have additional risk to the downside because not all of the lower strike puts (which are sold) are covered by that higher strike puts (that are bought).

Bearish trading was also seen in Jaguar Mining (JAG), Youku (YOKU), and Synovus Financial (SNV).

Index Trading

Trading was active in the index pits despite lackluster action in the equity market Wednesday. The S&P 500 Index (.SPX) lost 4.55 points to 1,357.66. Total options volume in the S&P 500, CBOE Volatility Index (.VIX) and other index products was 602,000 calls and 708,000 puts. The largest trades of the day were in the S&P 500 Index options pit after 30,000 March 1360 calls traded on the index at $16.50 and 30,000 March 1360 puts for $22. This hefty March 1360 "straddle" appears to be a new position. If bought, the straddle makes its best profits if the underlying makes a substantial move higher or lower in the near-term. If sold, the short straddle, which is at-the-money because 1360 is very near the SPX value of 1,357.66, is a bet that the index will hold in a range around current levels through the March expiration, which for SPX options is in 22 days.

ETF Action

SPDR Gold Trust (GLD) hit a morning low of $170.19, but thanks to a late-day rally in the yellow metal finished the day up $1.92 to $172.94. The top options trade in GLD, which is a fund that holds gold stored in bank vaults, was a 14,000-contract block of April 180 calls for $2.65 per contract. A 7,000-lot of March 165 calls traded at $8.40 at the same time. This Mar 165 - Apr 180 (1X2) call ratio spread is possibly a roll. That is, the investor might have been liquidating a position in in-the-money March 165 calls after a 13.7 percent advance in GLD so far this year. They may be now opening a new, larger, bullish position in the out-of-the-money April 180 calls in anticipation of additional gains in GLD in the months ahead.
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