Cusick’s Corner – Dollar Down, Market Up

Cusick’s Corner

Thanks Uncle Ben. The Fed chief spoke and the market interpreted his comments as well, bullish (QE3?). You got to love expiration week, the week when anything can happen. Back when I was on the trading floor, during Expiration week we wanted risk tied up by Wednesday so that if we got a move going towards the end of the week, we didn’t bleed. Shorts after this move have been stopped or pushed out of this market (includes credit spread strategists and those who sold calls), leaving very few shorts going into the After Hours. If you are one of those strategists who has a credit strategy or a short out there gone, do not hope, pray or cost average and think this will come back in line or not go further against you because this is not the week to do that. Take the opportunity to shut a position down or roll to another expiration month, manage the risk today, not tomorrow or Friday. See you After Hours.

Stocks are broadly higher with help from positive comments from Federal Reserve Chairman Ben Bernanke and rallying commodities prices Wednesday. In testimony to Congress, the Fed head suggested that policymakers are actively considering further monetary stimulus for the economy if needed. Meanwhile, the euro is trading up 1.3 percent against the dollar on diminishing concerns about Italy’s debt problems. Dollar weakness is helping some of the commodities and shares of energy, mining and metals companies. Crude oil added $1.35 to $98.78 per barrel and gold gained $22 to $1,584.30 an ounce. Exxon Mobile (XOM) and Chevron (CVX) are among the Dow’s winners, but all thirty components are trading higher and the industrial Average is up 134 points. The NASDAQ gained 37.5 points. CBOE Volatility Index (.VIX) lost 1.52 to 18.35. Options volume is running a bit higher than normal, with 4.7 million calls and 4.1 million puts traded through 12:30pm ET.

Bullish Flow

Two Toronto-based gold miners are seeing bullish trading today after gold gained $22 to $1,584.30 an ounce. Yamana Gold (AUY) shares are up 40 cents to $13.25 and 45,000 options contracts have traded in the name so far. Typical volume at midday is 6,740 contracts. The volume includes about 42,000 calls and 3,000 puts. The top trade of the day is a spread, in which the investor sold 6,700 October 13 calls at $1.02 and bought 6,700 October 14 calls at 61 cents. Therefore, they collected 41 cents on this Oct 13 – 14 call spread and are probably rolling a position up in strikes. That is, they are exiting a position in in-the-money calls after the stock’s run higher and opening a new position in out-of-the-money call options.

US Gold Corp (UXG), another Toronto-based miner, is trading up 52 cents to $6.56. Options volume in UXG through midday includes 9,387 calls and only 1 put option. November 7.5s, which are 14.3 percent out-of-the-money, are the most actives. 7,673 traded against 654 contracts of open interest. In addition, with 72 percent trading at the ask, it appears that call buyers are driving the flow and looking for UXG to rally beyond $7.5 through the November expiration. August 7.5 calls are seeing some interest as well.

Bearish Flow

Taiwan Semiconductor (TSM) puts are actively traded today. Shares of the chipmaker are up 29 cents to $12.53. Meanwhile, 16,000 puts and just 300 calls traded in TSM. August 12.5 puts are almost at-the-money and are the most actives. 14,550 traded and, with nearly all of the volume (98 percent) trading at the ask, it appears that buyers are taking new positions in TSM. October and July 12.5 puts are seeing some interest as well. No news on the stock today. The bearish trading might be in reaction to an earnings warning from Microchip Technology (MCHP) yesterday. The company slashed its first quarter outlook due to broad weakness in consumer and corporate demand.

A block of puts trades on Seattle Genetics (SGEN) Wednesday morning. Shares are up 56 cents to $20.36 and one investor bought 3500 July 15 puts on the biotech at 30 cents per contract. Open interest is 338 contracts. So, this appears to be a new position and a short-term play because the July options expire at the end of the week. A shareholder might have bought the puts to protect stock ahead of a July 14 FDA Panel for the company’s brentuximab vedotin treatment.

Unusual Volume

Newmont Mining (NEM) options volume is running 2X the (22-day) average, with 39,000 contracts traded and call activity accounting for 57 percent of the volume.

El Paso (EP) options volume is 3.5X the average daily, with 34,000 contracts traded and call volume representing 68 percent of the activity.

Goldcorp (GG) options volume is running 2.5X the average daily, with 33,000 contracts traded and call volume representing 68 percent of the total volume.

Increasing options activity is also being seen in Pepsico (PEP), Yum Brands (YUM), and Coinstar (CSTR).

Implied Volatility Mover (EBIX) shares are down and implied volatility is up today. Shares of the Atlanta-based software company hit a morning low of $17.65 amid high volume and volatile trading. EBIX is now down $1.34 to $18.14 and options volume in the name is 8,630 puts and 900 calls. Typical volume through midday is 830 contracts. Meanwhile, implied volatility has jumped 33 percent to 67.5, but with no news on the stock to explain the unusual volume in EBIX today.


Joe Cusick