Cusick's Corner 09-19-2012

The action in the Gold markets has been impressive with the trend to the upside (thanks QE!) but it is very clear that this is a one-sided market -- bullish. This sets up the potential for some really big moves. It's almost like you are on a plane and then out of nowhere the plane drops, it's the type of action that gold traders will have to deal with. This also means that sizing of positions and stops should be more conservative. I will be watching the action in the Euro currency, FXE, any weakness may challenge the ECB plan, potentially pop the Dollar and stress on equities. See you After Hours.
Stock market averages are holding modest gains on another quiet day of trading Wednesday. Markets were mostly higher overseas, led by a 1.2 percent jump in Tokyo's Nikkei after the Bank of Japan announced a 10 trillion yen asset repurchase program. Germany's DAX gained .6 percent and was leading European markets higher and investors are now waiting Spanish bank stress test results for the next major catalyst to move Eurozone equity markets. In the US, the domestic economic news included August housing starts, which increased to 750K, from 733K and a bit below expectations of 770K. However, existing home sales rose to an annual rate of 4.82 million, from 4.47 million and better than consensus estimates of 4.58 million. Action in the commodities market is mixed. While crude oil is down $2.84 to $92.78, gold was up $2 to $1773.2. On Wall Street, the Dow Jones Industrial Average is up 48 points and near session highs. The NASDAQ added 5. Overall options volumes are picking up heading into this week's Quadruple Witch expiration. 3.75 million calls and 2.75 million puts traded across the exchanges through 11:45am ET.
Bullish Flow

Pioneer Natural Resources (PXD), an Irving, TX independent oil and gas company, is down $1.03 to $107.69 and options volume on the stock is 16.5X the daily average, being driven by a large call spread. The investor sold 25,000 December 110 calls on PXD at $7.50 and bought 25,000 December 130 calls for $1.70 per contract. Looking at the historical data on PXD suggest a possible position adjustment. On June 1, a December 110 - 140 call spread was bought on the stock for $5, 25000X. Shares are up about 19 percent since that time, and today's call spread appears to adjust the position to an December 130 - 140 call spread - selling to close the 110s while opening in the 130s. The trader might be taking a bit of money off the table, but they are also keeping bullish exposure in the name on the view the rally might continue.
A hefty put spread trades in TJX today. Shares of the retailer are down 34 cents to $45 and an investor sold 25,000 September - October 45 put spreads on the stock at 73 cents, 25000X. The action appears to roll a short position from September to October. Most of the Sept puts were apparently opened in late-August when TJX was trading for almost $46 per share. Now, with the stock falling to $45, the Sept 45 puts are at-the-money heading into the expiration. It appears that the strategist might be closing the position to avoid the risk of assignment if shares fall below $45 and the contract is in-the-money at this week's expiration. When an option is precisely at-the-money heading into the expiration in can create a dilemma for the options trader (known as pinning), as there is uncertainty about whether the contract will finish in-the-money or out-of-the-money at expiration. In this case, a new position in Oct 45 puts is being opened on the view TJX could hold above $45 through the October expiration.
Bearish Flow

Oil Service HOLDRS (OIH) are down 42 cents to $42.05 per share after crude oil prices fell $2.84 to $92.78 on the heels of bearish weekly inventory data. OIH, which represents ownership in a basket of different oil drilling and equipment companies, is seeing active trading of more than 3.2 million shares and 33,000 options. Much of the flow is concentrated in the September 42 puts on OIH, which are 5 cents out-of-the-money and expire at the end of the week. 29,000 contracts traded against 8,955 in open interest. Some player in the options market might be opening positions on the view that additional short-term volatility in the oil drillers is possible before the weekend.
Danaher (DHR), the Washington, DC-based machinery company, has added 25 cents to $55.91 and options volume is running 5X the daily average. 1,050 calls and 4,600 puts traded on the stock so far. October 55 puts are the most actives. 1,700 traded. September 55 and October 60 puts are seeing interest as well. Implied volatility in the options on the stock rose 5 percent to 21. The increased activity comes as the company presents at a Citi Global Industrials Conference Wednesday.
Unusual Volume

Questcor Pharmaceuticals (QCOR) options volume is running 22.5X the (22-day) average, with 126,000 contracts traded and put volume accounting for 57 percent of the volume.
TJX options volume is 12.5X, the average daily, with 52,000 contracts traded and call volume representing for 99 percent of the activity.
General Mills (GIS) options volume is running 4.5X the average daily, with 28,000 contracts traded and call volume accounting for 63 percent of the activity.
Increasing options activity is also being seen in Delta Airlines (DAL), Baxter (BAX), and Toll Brothers (TOL).
Implied Volatility Mover

CBOE Volatility Index (.VIX) is down .43 to 13.75 and options on the index are actively traded. Some investors are probably rolling positions to the October term after the September contracts on the index expired this morning. The settlement for VIX Sept options is 14.03. Any call option with a strike of 14 or less is expiring in-the-money and any put with a strike of 15 or higher is also ITM. 304,000 calls and 85,000 puts have traded in the VIX pit so far today and 66 percent of the activity is in the front-month October options. Oct 24 calls, 20 calls, 16 puts, 16 calls, and 14 puts are the most actives.
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