Cusick's Corner 04-24-2012

This was a choppy, grinding day as we wait for AAPL earnings and the FOMC decision and statement. Speaking of AAPL, the expected move is $33.50 -- I used the front month straddle & strangle and then divided by 2 at 3:39 pm ET. By looking at these options prices, the overall options marketplace appears to be pricing the options with the expectation that the stock may potentially move and have a $33.50 range between now and 4/27 which is the expiration of these weekly options. A potential 6% move is priced into the weekly options which is a large move in a $500-$600 stock. These April weekly options are also running at twice the May's volatility and May is running 10 points higher than the back months. I will continue to monitor the crush of volatility after the announcement in AAPL tonight. I will also be getting ready for CAT's earnings which may be a good barometer for gauging infrastructure, XLI, plays. See you Midday.
Stock market averages finished mixed on a busy day of earnings news Tuesday. AT&T (T) shares finished up 3.6 percent and led the Dow Jones Industrial Average on the heels of its latest profit report. United Technologies (UTX) and 3M (MMM) saw post-earnings gains and helped the Dow to higher ground today. However, a 2 percent pre-earnings loss in Apple (AAPL), and steep losses in Netflix (NFLX) and Symantec (SYMC), weighed on the NASDAQ. Yet, overall market breadth was net positive after steady trading overseas and mixed domestic economic news. France's CAC 40 gained 2.3 percent to lead an advance across the Eurozone and the euro edged up .2 percent to 1.3185 against the buck. On the economic front, a report on Consumer Confidence showed a decline to 69.2 in April, from 69.5 in March and below expectations of 69.5. However, New Homes Sales were down to an annual rate of 328K in March, from an upwardly revised 353K in February and better than the 318K that was expected. Crude oil was up 39 cents to $103.5 per barrel and gold gained $9.5 to $1642 an ounce. On Wall Street, the Dow Jones Industrial Average was up triple digits midday, but pared the gains and finished up 75 points. The NASDAQ lost 8.9 points.

Rio Tinto (RIO), the British minerals and mining giant, added 35 cents to $55.05 and a hefty call spread trades on the stock late-Tuesday. In this vertical spread, the strategist bought 24,000 May 55 calls at an average of roughly $2.23 per contract and sold 24,000 May 57.5 calls at $1.05 per contact. The spread, for a $1.18 net debit, is possibly a roll down in strikes. Open interest in the May 57.5 calls, which are 4.5 percent out-of-the-money and expiring in three-and-a-half weeks, is 25,477 and the largest position in the miner. The strategist might have sold to close a position in 24,000 contracts today on hopes for a move beyond $57.5 over the next 24 days. However, they might be maintaining a bullish position in RIO by opening a new position in the May 55 calls, which are already 5 cents in-the-money.
Bullish trading was also seen in Nabors Industries (NBR), Banco Sandander (STD), and US Airways (LCC).

Cisco Systems (CSCO), which saw increasing call writing Tuesday morning, was the subject of a hefty put purchase late in the day. As noted in the Xpound Midday update, call writers were busy in the May 20s on the networking giant. Later in the day, the stock faced a bit of selling pressure and finished down 26 cents to $19.42 after Juniper Networks (JNPR) pre-released earnings and guided its forward estimates lower. JNPR erased the loss, however, and gained $1.48 to $21.65 on the day. Nevertheless, the news seems to have stirred up defensive trading in Cisco, as a 28,000-contract block of June 18 puts traded on the stock for 31 cents per contract on the International Securities Exchange, where data indicate an investor bought the hefty block to open a new position. May 18 puts were the most actives in Cisco today. 34,800 changed hands. High volume in downside $18 puts on Cisco comes ahead of the company's May 9 earnings report.
Bearish trading was also seen in Motorola Mobility (MMI), Pulte Group (PHM), and Omnivision Technology (OVTI).
Index Trading

It was a slow day in the index market, as many macro players are possibly waiting for the conclusion of Wednesday's FOMC meeting before making any larger trade on the S&P 500 Index (.SPX), CBOE Volatility Index (.VIX) or other cash indexes. 352,000 calls and 445,000 puts traded in the SPX pit and other products today, which is only 62 percent of the recent average daily volume for the index market, according to Trade Alert data. The S&P 500 Index added 5.03 points to 1,371.97 and VIX, which tracks the implied volatility priced into S&P 500 Index options, lost .87 to 18.10. Meanwhile, the most active index contract of the day was the VIX May 22 calls, as some investors might have been buying the upside calls on expectations of heightened volatility around tomorrow's Fed meeting.
ETF Action

SPDR Retail Trust (XRT) lost 91 cents to $59.33 after Walmart (WMT) suffered a second day of losses on worries about a bribery scandal, which surfaced in the news media over the weekend. A hefty post-earnings loss in Big Lots (BIG) also weighed on the retail sector today. Options volume on XRT was busy, or 3X the daily average, after 64,000 puts and 5,900 calls traded in the product. Much of the put volume was due to one spread trade, in which the investor bought 15,000 June 58 puts on the stock for $1.71 and sold 30,000 June 55 puts at 83 cents. The 1X2, for a five-cent debit, is a bearish play that offers its best payout if shares fall to $55 through the June expiration, or 7.3 percent over the next 52 days. The debit is at risk if the position is held to the expiration and XRT stays above $58. There is additional risk to the downside (and margin required) when dealing with put ratio spreads, because not all of the lower strike puts, which were sold, are covered by the higher strike puts, that are bought.
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