Cusick's Corner 05-08-2012

As I write this the market is at its worst levels -- S&Ps 1347, NDX 2596, and the Dow Jones Industrials, INDU 12,830 are all below mid-term support, 50-Day Moving Average. At this stage the market is giving back all of the April rise and if the market settles at these levels, old support is now resistance. Disciplined shorts will probably be covering into this pullback, and I say disciplined only because this is a deep pullback but with liquidity always in the wings one may not want to look at a gift horse in the mouth two days in a row. Looking at the Retail sector, XRT -1.75%, this happened fast, a little faster than I expected. Not only will Retail names be on the radar, we need to keep an eye on the Consumer Discretionary, XLY, especially names like MCD, DIS, HD, and CMCSA which make up almost 22% of this index and are under pressure. See you After Hours.
Stock market averages are deep in the red on concerns about European debt problems. With no domestic economic news to guide the early action, the focus is on Europe and an uncertain political situation in Greece. Leaders are struggling to form a government after weekend elections and some investors are worried that the lack of progress will derail the anticipated bailout of the debt-ridden nation. France's CAC 40 Index fell 2.8 percent and paced a broad decline across Eurozone equity markets. US stocks followed suit and have failed to stage any meaningful rally attempts through midday. The Dow Jones Industrial Average is down 145 points and the NASDAQ had lost 37. Crude oil slid $1.76 to $96.18 per barrel and gold tumbled $36 to $1,603.5 an ounce. CBOE Volatility Index (.VIX) is up 1.41 to 20.35. Trading in the options market is active and reflects the cautious underlying tone, with approximately 3.8 million calls and 3.9 million puts traded across all the exchanges through 11:30am ET.
Bullish Flow

Proshare UltraShort Euro Fund (EUO) is up 12 cents to $19.87 in heavy trading of 1.8 million shares after the euro lost .3 percent to 1.30 against the dollar. EUO is a leveraged exchange-traded fund designed to move the inverse to the EUR/USD currency pair. Buying calls on EUO represents a bearish bet on the euro, bullish on the dollar. That seems to be the order of the day Wednesday, as 7,380 calls and only 425 puts traded on EUO through midday. May 20 calls, which are .7 percent out-of-the-money and expiring in 10 days, are the most actives. 3,560 changed hands. May 21 and August 21 upside calls on the ETF are seeing interest as well. Important Information: Inverse ETFs are designed to achieve their investment objective on a daily basis are not designed to track the underlying index or benchmark over a longer period of time. Inverse and leveraged ETFs that are reset daily are unsuitable for investors who plan to hold these products for longer than one trading session. Over longer periods of time, leveraged and inverse ETF performance can differ significantly from their daily objective due to the effects of compounding.
Calls on Gold Fields (GFI) are actively traded. Shares of the gold miner are down 30 cents to $12.53 on a rough day for the sector after gold prices plummeted nearly $40 an ounce. In options action, 20,000 calls and 1,400 puts traded on GFI so far. The flow is heavily concentrated in October 13 calls. More than 18,500 contracts have changed hands so far. Oct 13 calls on GFI are 3.8 percent out-of-the-money and some investors might be taking positions in the contract on the view that a three-month 24.9 percent slide in the stock presents an opportunity for bullish trades on the stock. Rather than buying shares outright today, they are buying options that give the right to buy (or call) the stock for a specific price [[strike]] through a set date (expiration date).
Bearish Flow

Qualcomm (QCOM) is off 67 cents to $61.25 and has now given up almost 9 percent since earnings were reported on April 18. One or more investors seem to be concerned about additional losses in the chipmaker. In morning trading, 8,000 July 52.5 puts were apparently bought on QCOM for 66 cents and 8,000 July 67.5 calls sold at 80 cents. This bearish "risk-reversal", for a 14-cent credit, has traded more than 10,000X and is a new position in the options on the stock, according to data from one of the exchanges. If so, the investors might be selling calls to buy puts and setting up a "collar" around an existing stock position. The purchase of downside puts limits the risk to the downside from holding shares, while selling calls also limits the upside potential associated with owning the stock.
SPDR Retail Trust (XRT) is off 89 cents to $59.48 in active trading of 6.8 million shares and some investors appear to be bracing for the possibility of additional losses in the ETF. 89,000 puts and 3,590 calls have traded in XRT options so far. May 56 puts, which are 5.9 percent out-of-the-money and expiring in 10 days, are the most actives. More than 55,000 traded so far. June 55 and 58 puts are seeing active trading as well.
Unusual Volume

Arena Pharmaceuticals (ARNA) options volume is running 4.5X the (22-day) average, with 140,000 contracts traded and call volume accounting for 61 percent of the volume.
iShares MSCI Europe, Asia, Far East Fund (EFA) options volume is 2X the average daily, with 134,000 contracts traded and put volume representing for 78 percent of the activity.
SPDR Retail Trust (XRT) options volume is running 3.5X the average daily, with 92,000 contracts traded and put volume accounting for 94 percent of the activity.
Increasing options activity is also being seen in Electronic Arts (EA), SPDR Basic Materials (XLB), and SPDR Industrials (XLI).
Implied Volatility Mover

CBOE Volatility Index (.VIX) rallies to recapture the 20 "psyche" level Tuesday. The market's "fear gauge" is up 1.41 to 20.35 and has now rallied more than 25 percent over the past eight trading days. Not everyone seems convinced the gains can last, however, as May 17, 18 and 19 puts are the most actives in VIX Tuesday. May options on VIX expire one week from today. So some of the activity is possibly closing or offsetting trades. Total volume in the VIX pit through midday is 133,000 calls and 96,000 puts.
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