Cusick's Corner 04-13-2012

This has been a tough week -- the S&Ps finished down 2%, but we did have two days of strength to the upside, plus two financial heavyweights reported better than accepted. This pullback after a big two day push is not too surprising. Technically this market appears to still be in a bull phase and with the Fed still very much in play, it is going to potentially take a major headline to get the bears roaring. Have a great weekend.
Stock market averages fell at the open on disappointing economic news and the selling intensified a bit in the final hour. The table was set for morning weakness on Wall Street after China's National Bureau of Statistics said Friday that economic growth slowed to an annual rate 8.1 percent in the first quarter, down from 8.9 percent in the fourth. Economists were expecting the world's second largest economy to grow by 8.3 percent. Meanwhile, stocks benchmarks suffered big losses across the Eurozone, including 2.4 percent declines in both Germany's DAX and France's CAC 40, amid concerns about the debt crisis after yields moved higher in Spain and Italy. The day's domestic news didn't help after the University of Michigan reported that its Sentiment Index for mid-April was at 75.7, down from 76.2 in late-March and below expectations of 76.2. A separate report released earlier showed the CPI up .3 percent in March, which was in-line with expectations. At the same time, Wells Fargo, JP Morgan, and Google are all seeing post-earnings weakness and the profit news didn't help sentiment much either. Yet, the decline was orderly until the final hour. The Dow Jones Industrial Average is now down 127 points and falling to session lows. With minutes left to trade, the NASDAQ is off 42.5 points.

Alcoa (AA) is down 29 cents to $9.88 today, but had winning week after rallying more than 9 percent in the two days after earnings were reported. The Dow component unofficially kicked off the earnings reporting season Tuesday afternoon and the stock saw heavy trading Wednesday and Thursday on the heels of the report. The action continued today, with another 40,000 calls and 41,000 puts traded on the aluminum-maker. Two of the top trades were part of spread in the January 2014 options, after 5,500 Jan14 $10 calls traded for $2.04 per contract and 5,500 Jan14 15 calls traded at 59 cents. The spread, for a $1.45 net debit, appears to be a bullish play on AA that will make its best profits if shares rally to $15 or beyond through the 2014 expiration. An investor might be looking to buy the stock, but rather than take a position in shares today, they are buying options contracts that give the right to buy (or call) the stock for a specific strike price (10) for a specific period of time (January 18, 2014). Selling the upside $15 calls helps to finance the purchase of the $10 calls and will also help mitigate some of the negative impact of time decay. Selling the $15 calls will also limit the upside possibilities associated with owning a $10 calls.
Bullish trading was also seen in Safeway (SWY), SodaStream (SODA), and Ericson (ERIC).

Put volume is picking up in HSBC (HBC) Friday. Shares of the British bank lost 73 cents to $43.02 and helped pace a decline across UK's equity markets. The FTSE lost 1 percent Friday on concerns about the unfolding debt crisis. Meanwhile, 7,470 puts and 2,590 calls traded on the banking giant. Most of the activity was in smaller sizes. The biggest trade in HBC today is a 226-lot of April 43 puts for 55 cents per contract. 2,600 contracts traded total. June 41, April 42 and April 43 puts were the next most actives in HSBC and levels of implied volatility in the options on the stock increased by 8 percent to 28, as some investors were likely buying downside puts on concerns that bearish headlines might surface again and sink some of the European financial names in the days ahead.
Bearish trading was also seen in Steel Dynamics (STLD), Huntington Bancshares (HBAN), and Viacom (VIAB).
Index Trading

It's a relatively quiet finish to the trading week in the index pits, as 578,000 calls and 562,000 puts traded on the CBOE Volatility Index (.VIX), S&P 500 Index (.SPX), and other cash indexes Friday. SPX is down 13.49 to 1274.08 late in the day and VIX, which tracks the expected volatility priced into S&P 500 Index options, jumped 2.12 to 19.32. The most actively traded index contracts on the day are in the VIX April and May 28 calls. More than 60,000 traded in both contracts. One or more investors might have been buying the spread (selling April 28s to buy May 28s) and possibly rolling a bullish positions in the VIX out an additional month. VIX April options expire next Wednesday and have two trading days of life remaining after today. The expiration for equity and ETF options is next Saturday and the last day to trade is a week from today which is on Friday. The last day to trade many of the other index products is Thursday before the settlement value is computed on expiration Friday.
ETF Action

iPath Short-term Futures Fund (VXX) is up 94 cents to $19.25 and trading in the options on the fund is busy today. 100,000 puts and 78,000 calls traded in the product. April 19 puts, which are now 25 cents in-the-money, are the most actives. VXX has rallied 14.7 percent so far in April and April 19 puts on the ETF are falling out-of-the-money heading into next week's expiration. 26,600 contracts traded and, with 84 percent of the trades hitting on the bid, some investors might have been closing out or liquidating positions in the contract on the view that the 8-week decline in volatility, which ended in late-March, has now run its course. In other words, these investors now expect VXX to hold above $19 through next week and are closing out bearish positions in the ETF.

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