Cusick's Corner 11-27-2012

Still wrapped around the open -- but the bonds did bounce into the close as comments from Senator Reid suggested that there has been little change in the fiscal discussions. The Energies did falter into the close while Crude did finish under the uptrend, $87.5, which has consistently held up to this close. Looking at some names that are reporting tonight, Green Mountain (GMCR) options prices are inferring an estimated move ~5, and post earnings it is up ~4 in the After Hours. This is why some traders might look at current options prices to help with forecasting. See you Midday.
Stock market averages fell and settled very near session lows Tuesday. The economic data seemed largely ignored after a report showed Durable Goods unchanged in October, which was better than the -.4 percent that was expected. Separate data released later was the Conference Board's Consumer Confidence Index improving to 73.7 in November, multi-year highs, and better than the 73.0 that was expected. October was reported at 72.2. Stocks wavered despite the better-than-expected numbers amid sluggish trading across most global equity markets. While action was mixed through most of Asia, Shanghai's Composite Index lost over 1 percent and fell to multi-year lows. At the same time, European equity markets failed to show much reaction to news that finance ministers have agreed to another round of aid to Greece. Action in the commodities markets was also uninspired. Crude oil dropped 53 cents to $87.21 and gold gave up $8.5 to $1741. On Wall Street, the Dow Jones Industrial Average was down about 15 point midday and then fell even more in afternoon action after Senator Harry Reid said talks on resolving the Fiscal Cliff were making little progress. At the end of the day, the Dow had surrendered 89 points and finished 9 points from session lows. The NASDAQ dropped 9.

The largest blocks of equity options Tuesday surfaced in morning action when one investor sold 20,696 February 75 calls on Anadarko Petroleum (APC) at $4.25 and bought 25,870 February 80 calls on the oil driller for $2.42 per contract. Shares are down 65 cents to $73.61 heading into the close of trading and, on the surface, the call spread seems to express the view that APC will hold below $75 through the expiration (because the spread was sold). However, looking at open interest and trade history, the activity appears to roll a bullish position up in strike prices. Open interest in Feb 75 calls on APC is 29,711 and most of the interest apparently dates back to late-October when the stock was about 11 percent below current levels. The investor now appears to be exiting the 75s after the stock's run higher, while taking a new bullish position in the deeper out-of-the-money Feb 80 calls on APC. If so, the hefty roll seems to express confidence that the stock's run will continue through mid-February 2013.
Bullish trading was also seen in Freeport McMoran (FCX), Omnivision Technology (OVTI), and Cheniere Energy (LNG).

Herbalife (HLF) shares dropped $1.16 to $46.52 in active trading of 1.65 million shares and options volume was 3X the daily average Tuesday. About 26,000 puts and 2,600 calls traded on the ticker, a ratio of ten-to-one. December 40 puts, which are now 14 percent out-of-the-money and expiring in 24 days, were the most actives in HLF. 7,627 traded against 3,206 in open interest. January 37.5 puts, December 45 puts, and January 40 puts were the next most actives and implied volatility in HLF options was up 14 percent to 66.5. It's not clear what motivated the increased activity, as the company reported earnings last month and there have been few headlines on the stock of late. For whatever reason, it seems like the bears were circling HLF and bracing for a possible drop in shares in the weeks/months ahead.
Bearish trading was also seen in Nexen (NXY), Suntech (STP), and Youku (YOKU)
Index Trading

Overall options volumes were light today and slightly more than 13 million contracts, but CBOE Volatility Index (.VIX) saw increasing options activity. VIX, which tracks the expected or implied volatility of S&P 500 Index (SPX) options, ticked .37 higher to 15.87 after the S&P 500 lost 7.35 points to 1,398.94 and settled just below the 1,400 level Tuesday. In options action, 552,000 options traded in the VIX pit, which is interesting, because the volume was greater than the activity in the SPX itself. About 500,000 contracts traded in the S&P 500 pit. The most actively traded index options of the day were the December 15 puts, December 16 calls, December 14 puts and December 16 puts on the volatility index.
ETF Action

Dow Jones Real Estate Fund (IYR) lost 34 cents to $63.08 in relatively active trading of 18 million shares today. Meanwhile, options order flow on the ETF was lop-sided, as 73,000 puts and 17,000 calls traded on the ticker. One large spread trade drove some of the activity after an investor sold 15,000 December 62 puts on IYR at 64 cents per contract and bought 10,000 January 62 puts for $1.07 per contract. IYR is an exchange-traded fund that holds Real Estate Investment Trusts {{REITs}} and shares of real estate companies. The spread trading appears to roll a position in 62 puts out to January from December. The contract is now 1.7 percent out-of-the-money. The investor possibly sees diminishing odds for a move below $62 in the ETF by the December expiration (62 days), but expects shares to fall below that level by the January expiration (52 days). Therefore, they are closing out December and opening a position (two thirds the size) in January at the same strike price.

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