Cusick's Corner 08-01-2012

I was just on my way to the airport and saw a motorcyclist dump her bike, thankful that she wore a helmet and was ok -- it really puts things into perspective. As far as the markets are concerned, the Fed did focus on some key issues -- making some hawkish statements on housing, but really putting the ECB in the spotlight. Basically waiting for their announcement before any concrete actions until they layout their plan. So expect some volatility early in the morning. See you Midday.
Action was mixed through midday, but market averages fell in the final two hours of trading after the FOMC concluded its meeting on monetary policy and offered not definitive signs of further easing. Officials left rates unchanged, as expected, and largely left the post-meeting statement unchanged as well. Some investors might have been anticipating the Fed to signal more convincing signs of quantitative easing. The kneejerk reaction sent stocks broadly lower, but the selling never gathered any significant momentum and the Dow Jones Industrial Average had trimmed much of the losses in late-day action. The day's other news included ADP'S monthly jobs report that showed the US economy added 163,000 private sector jobs last month. The number was almost 40,000 better-than-expected and comes ahead of the Labor Department's widely-watched report Friday morning. The day's other economic stats, released later, were less bullish. ISM Index for manufacturing was up to 49.8 in July, from 49.7 last month and below expectations of 50.1. Construction spending increased by .4 percent in June and .1 percent less than expected. Trading was whippy around the data and into the Fed's statement. Then stocks fell before rebounding modestly into the closing bell. The Dow Jones Industrial Average lost 33 points Wednesday and finished up 24 points from session lows. The NASDAQ lost 19.3.

Valero (VLO) lost 35 cents to $27.15 in active trading of 12.4 million shares today, the day after the oil refiner jumped 4.1 percent on earnings news. Valero said Tuesday morning that it earned $1.5 per share last quarter, which was six cents better than Street estimates. Revenues also topped expectations. The stock gave back some of the gains and options on Valero were actively traded today. 35,000 calls and 3,900 puts traded in the name. The top trade was a 10,000-contract block of August 29 calls for 24 cents when the market was 23 to 24 cents. The next largest block was 8,900 September 30 calls for 46 cents when the market was 43 to 45 cents. More than 10,000 traded in both the August 29 and September 30 calls on Valero today. August 28, January 35, and September 25 calls were the next most actives, as some investors might be taking position in call options after a two-month 31.3 percent rally in the stock and on the heels of Valero's better-than-expected earnings yesterday.
Bullish trading was also seen in Rockwell (ROK), Leap Wireless (LEAP), and Lions Gate Financial (LGF).

The largest equity options blocks traded Wednesday were in Research In Motion (RIMM). Shares gave up 3 cents to close $7.12. In midday action, an investor apparently bought 50,000 January 8 puts on the Blackberry-maker for $1.80 and sold 50,000 January 11 calls at 34 cents. In other words, a bearish risk-reversal was initiated in RIMM for $1.46, 50000X. Looking at the trade history of the two contracts suggests that the trade probably closes out legs of a bullish trade opened on June 6 and July 5. Shares have not performed well in recent months and today's big trade might reflect diminishing hopes for a substantial rebound in RIM in the months ahead. However, the risk-reversal was also tied to a block of 3.6 million RIM shares and therefore probably not an outright bullish or bearish view using options on the stock.
Bearish trading was also seen in Focus Media (FMCN), Knight Capital (KCG), and Rackspace (RAX).
Index Trading

Options volume in the index market has been surprisingly light this week given the recent fixation on macro-economic news. Volume in the S&P 500 Index (.SPX), CBOE Volatility Index (.VIX) and other index products will often increase ahead of important events like Central Bank meetings and important jobs data. Yet, trading is quiet in early-August 2012 and the action stands in stark contrast to a year ago. VIX made a run to 2011 highs of 48 on August 8 last year. Today, VIX ticked up .03 to 18.96. Meanwhile, 404,000 calls and 497,000 puts traded on VIX, SPX and other cash indexes which is only 77 percent the average daily volume for the index market.
ETF Action

SPDR Technology Fund (XLK) saw a flurry of activity late-Wednesday. Shares lost 10 cents to $29.16 and, shortly after the Fed's post-meeting statement started making the rounds, a block of 20,100 September 30 calls traded on XLK for 40 cents when the market was 30 to 40 cents. Blocks of Sep 30 calls continued to trade on the exchange-traded fund into the close. At the end of the day, volume in XLK Sep 30 calls was a whopping 71,979 contracts. It's not clear what motivated the surge in volume late-Thursday. XLK is a fund that holds all of the technology-related names from the S&P 500. Sep 30 calls on the ETF are currently 2.9 percent out-of-the-money and expiring in 51 days.
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