Cusick's Corner 03-05-2012

Are there chinks in the equity markets, any Armor? That's the question that many traders are asking today. With Apple (AAPL) pulling back into the midday (we discussed this in one of my breakouts in Miami over the weekend), the general market came under pressure. The bid in the equities is under pressure and we will wait and see if they come in, but I would be leery if the S&Ps are not able to hold the 1350 level. I should also note that I have been watching the Small Caps, RUT/IWM, and the inability of this market to rally. It has broken down today and if this weakness continues it could be hard for the Large Cap indices to potentially bounce into the After Hours.
Concerns about the global macro-economy seem to be weighing on Wall Street Monday. The bad news was mostly overseas after China lowered its official GDP forecast and data on manufacturing in Italy and Spain fell well short of estimates. The disappointing news from overseas was partly offset by the latest ISM Services Index, which showed economic activity outside of manufacturing improving to 57.3 in February, from 56.8 the month before and better than the 56.0 economists had expected. Separate data on Factory Orders was down 1 percent in January and not as bad as the 1.9 percent that was expected. Still, Alcoa (AA) shares are off 3.2 percent and the biggest losers in the Dow amid weakness in many of the metals and mining names Monday. PHLX Gold and Silver Mining Index (.XAU) is down 2.5 percent after gold lost $5 to $105 an ounce and silver slipped 55 cents to $33.94 an ounce. Crude oil is up 27 cents to $106.97. Meanwhile, the Dow Jones Industrial Average is down 60 points and 34 points off session lows. The NASDAQ lost 32 points. CBOE Volatility Index (.VIX) added 1.23 to 18.52. Trading in the options market is active and a becoming a bit more defensive, with 4.2 million calls and 4 million puts traded by 12:25pm ET.
Bullish Flow

Pandora Radio (P) adds 81 cents to $14.71 on heavy turnover of 5.6 million shares ahead of earnings. The company is due to report earnings after the closing bell tomorrow. Stifel Nicolaus analysts upgraded the stock to a Buy today, which is probably giving the stock a lift to start the week. Meanwhile, 16,000 calls and 1,765 puts traded on Pandora so far. By way of comparison, expected volume through midday is 1,830 contacts. March 16 calls, which are 8.8 percent out-of-the-money and expire in 11 days, are the most actives on the stock. Volume is approaching 7,000 contracts. June and March 15 calls are the next most actives. Some investors might be taking positions in upside calls on hopes for a post-earnings lift in Pandora shares Wednesday. However, the stock fell 11.3 percent on 11/23 after earnings were last released.
iShares Silver Fund (SLV) is off 90 cents to $32.86 following another day of losses for the metal. Silver is down 82 cents to $33.90 and has given up 9 percent since Tuesday of last week. One investor in the options market seems to be anticipating a move higher in silver prices over the next 12 months, however, and initiated a substantial call butterfly spread on the silver exchange-traded fund today. In morning trading, 7,000 March (2013) 40 calls were bought on SLV for $2.60, 14,000 March 50 calls sold at $1.14, and 7,000 March 60 calls bought for 63 cents. This Mar2013 40 - 50 - 60 call butterfly spread, for a 95-cent net debit, is a bullish play that offers its max payout if shares rally to $50 through the March 2013 expiration, or a 52.2 percent surge over the next 375 days.
Bearish Flow

Chelsea Therapeutics (CHTP) is off 18 cents to $3.44 and is now down 11.3 percent since the stock rallied on 2/24 after a positive FDA panel review of the biotech's Northera drug. A final decision regarding approval of the drug is expected later this month. One options strategist appears to be taking a cautious stance ahead of the news and bought an April 3 - 4 put spread on the stock for 70 cents, 5000X. In this spread, 5,000 CHTP April 4 puts were bought for $1.25 and 5,000 April 3 puts were sold for 55 cents per contract. If opening, the spread offers its best payout if shares fall to $3 or below through the April expiration. Looking at the open interest suggests the spread is a possible roll - or closing out a position in April 3 puts, which have 7,043 in open interest, while opening a new position in the April 4 puts, that have 3,283 in open interest. In either case, the spread seems to reflect a bearish short-term view on CHTP.
Large blocks of puts traded on some of the sector exchange-traded funds early-Monday. SPDR Industrials ETF (XLI) is up 34 cents to $36.80 and the top trade in the product is a 21000-contract block of June 35 puts traded for $1.05 per contract on the International Securities Exchange. A few minutes later, 17,630 June 35 puts traded on the SPDR Basic Materials Fund (XLB), also on the ISE. XLB is down 73 cents to $36.56. Data from the ISE indicate that both blocks of puts were bought to open. The new positions in June downside puts on XLB and XLI might be designed to hedge downside risk in those two market sectors over the next few months. While XLB holds all of the basic material names from the S&P 500, XLI holds all of the industrial-related companies from the index.
Unusual Volume

IShares Emerging Markets Fund (EEM) options volume is running 2.5X the (22-day) average, with 659,000 contracts traded and put activity accounting for 80 percent of the volume.
AIG options volume is 2X the daily average, 40 63,000 contracts traded and call volume representing 80 percent of the activity.
Consol Energy (CNX) options volume is running 4X the average daily, with 26,000 contracts traded and call volume representing 74 percent of the total volume.
Increasing options activity is also being seen in Gamestop (GME), Campbell Soup (CPB), and LEAP Wireless (LEAP).
Implied Volatility Mover

Implied volatility in the options on BP is moving lower today after the oil giant reached a settlement related to the Deep Horizon Gulf spill. The company will pay $7.8 billion. Shares are up 1.4 percent to $48.17 on the news and moving to their best levels in a year on heavy volume of more than 13 million shares. Meanwhile, 35,000 calls and 19,000 puts traded on BP and levels of implied volatility in the options on the stock is easing 10 percent to 26, now that this important company event risk appears to have passed.
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