Cusick's Corner 02-24-2012

The grind continued into the After Hours and while this is frustrating for traders, it's like Bill Murray's "Groundhog Day" -- we have seen this type of action repeat all week. I pointed this out on the close yesterday when the NASDAQ sat right at the 2600, so still no side tipping their hat. I did not like the fact that Consumer Discretionary, XLY, and the Financials, XLF, both lagged all week against the S&Ps. I will watch for an early squeeze next week, 'til then have a great weekend.
Stock market averages finished little changed on a slow news day. With not much news coming out of Europe, the domestic economy was in focus in the morning hours after the University of Michigan consumer sentiment index ticked up to 75.3 in late-February, from an initial reading of 72.5 and better than the 73.0 that economists had expected. New Home Sales hit an annual rate of 321K in January, from an upwardly revised 324K the month before, but better than the 315K that was expected. The data failed to stir up much volatility and trading was orderly across the Eurozone as well. Germany's DAX added .8 percent and UK's FTSE was flat. Crude is getting a bit more attention, as prices rose another $1.98 per barrel and to within striking distance of $110. However, the metals were weak. Gold lost $12 to $1174 an ounce and silver slipped 14 cents to $35.42. Action was mixed on Wall Street as well. While the Dow Jones Industrial Average gave up midday gains and lost 2 points. The tech-heavy NASDAQ gained 6.8 points.

Options on natural gas producer Chesapeake (CHK) were active today. Shares gained 47 cents to $25.45 and total options volume was 74,000 calls and 25,000 puts. The top trades on the stock surfaced late in the session when 10,000 April 22 puts traded on CHK at 39 cents, 10,000 April 27 calls for 74 cents, and 10,000 April 31 calls at 14 cents. All three blocks traded on the International Securities Exchange, where data indicated that the investor sold puts, to buy the April 27 - 31 call spread. If so, 21 cents was paid on the package and the investor seems to be anticipating further gains for the stock over the next two months. CHK has already rallied 20.4 percent month-to-date. It is also likely that today's spread trader is a willing buyer of the stock for $22 per share and is therefore writing the April 22 puts to possibly help finance the bullish call spread.
Bullish trading was also seen in Iron Mountain (IRM), Alcoa (AA), and Marvell Technology (MRVL).

Microsoft (MSFT) added 11 cents to $31.48 and was one of fourteen Dow stocks trading higher Friday. Fourteen of the Dow thirty moved lower, as mixed trading has become a familiar pattern on Wall Street in 2012. Meanwhile, 99,000 puts and 73,000 calls traded on Microsoft. The top trade was a 27,000-contract block of March 27 puts for 4 cents per contract on the Chicago Board Options Exchange. A source at the exchange informs us that the block was purchased. It appears to be a new position because volume exceeds the existing open interest. If so, the trade is somewhat unusual because March 27 puts on MSFT are 14.2 percent out-of-the-money with three weeks of life remaining. The delta of the put is -.03, which equates to a roughly 97 percent probably that the contract will expire worthless.
Bearish trading was also seen in Live Nation (LYV), Cemex (CX), and James River Coal (JRCC).
Index Trading

The S&P 500 Index (.SPX) didn't move much, but the CBOE Volatility Index (.VIX) scored gains Friday. The S&P 500 traded in a 5.5 point range and added 2.28 points to 1,365.74. The average daily move in the S&P 500 so far this year has been about 6 points, or less than .5 percent. Yet, VIX moved up .51 to 17.31 and finished 5.4 percent off session lows (of 16.42) today. VIX typically moves lower when the S&P ticks higher. Today, however, VIX saw an afternoon climb amid relatively high levels of put activity. 8.2 million puts and 8.3 million calls traded across all exchanges. So far this year, calls have been significantly more active than puts from one day to the next. Only one time in 2012, on January 24th, did total put volume exceed call volume. Today's higher levels of put activity along with the rise in the VIX could be a sign that investors are getting a bit more defensive and taking protective positions on concerns about a market pullback in the weeks/months ahead.
ETF Action

A massive put spread in the iShares MSCI EFA Fund (EFA) stood out on an otherwise quiet day of trading Friday. It was noted in the midday, but it is worth mentioning again. The fund, which holds shares of companies from Europa, the Far East, and Australia, finished up 33 cents to $55.15 and, in morning trading, one investor bought 81,200 May 52 puts on the fund for $1.38 and sold 81,200 May 43 puts at 26 cents. The spread, for a $1.12 net debit, is a bearish play that would offer its best payout if shares fall to $43 through the May expiration, or a 22 percent swoon over the next three months. The spread traded 121,000X on the day and was possibly being opened to hedge the risk of another round of volatility in global equity markets in the months ahead. Note that, while trading has been quiet lately, uncertainty persists about the Eurozone economic situation. Crude oil bubbling to $110 per barrel amid escalating tensions with Iran might also be raising some anxiety levels among investors as well.
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