Trapped. Cusick’s Corner

Cusick’s Corner

Trapped, that’s how longs in equities are feeling as we move into the Midday, and I want to see if this bounce off the lows is just another opportunity for the shorts to bang on the longs. With the commodity markets all pulling back, Oil, Grains, Gold, are in a mass liquidation. I talked about this today in an interview with SFO; we are seeing support levels in these assets being challenged. The Corn markets are challenging $580, Oil breaking $97.50, and Gold sliced $1600, which has these traders at a point; long specs in particular are liquidating. I will be checking if these markets firm up into the After Hours.

Stock market averages are lower for a third time this week amid ongoing concerns about the European Debt Crisis. Stocks moved broadly lower across the Eurozone Wednesday after bond yields rose in Italy and the euro fell below 1.3 against the dollar for the first time in 11 months. France’s CAC 40 Index lost 3 percent and paced the decline across Europe’s equity markets on worries last week’s highly-touted EU summit failed to generate any hard solutions to stem the debt crisis. Plunging prices in the commodities markets are also weighing on Wall Street. Crude oil lost $4.20 to $95.95 after OPEC sealed a new output agreement. Gold shed $74 to $1589 an ounce and silver is down $2 to $29.24. Meanwhile, the Dow Jones Industrial Average fell as much as 137 points in morning trading and is now down 97 points midday. The NASDAQ lost 38.5 points. CBOE Volatility Index (.VIX) is up 1.13 to 26.54. Overall options volume is picking up heading into this week’s Quadruple Witch expiration, with 4.9 million calls and 5.7 million puts traded through 12:45pm ET.

Bullish Flow
Avon Products (AVP) is bucking the bearish trend after the cosmetics company announced a shake-up at the executive level. Tuesday afternoon, Avon said that Chief Executive Andrea Junge is stepping down and the company is seeking a new CEO. Investors seemed to applaud the decision, because shares are up 99 cents to $17.13 on the session. Meanwhile, the top options trade on the stock today is a 10,000-contract block of July 20 calls traded at the 95-cent asking price. Since open interest is only 539 contracts, the trade appears to be a new position on hopes the stock will rally beyond $20 (+16.75%) through the July 2012 expiration.

Market Vectors Gold Mining Fund (GDX) is down $1.15 to $52.89 on weakness in the gold mining names after the precious metal dipped back below $1600 an ounce. Options volume on GDX, which is an exchange-traded fund that holds a basket of leading mining names like Newmont (NEM), Barrick Gold (ABX), and Goldcorp (GG), includes 67,000 calls and 68,000 puts. The largest trade of the day is a 27,480-contract block of January 63 calls traded at the 18-cent asking price. One player bought the block, according to a source on the exchange floor, and is possibly bracing for a sharp rebound in the sector in the weeks ahead. GDX Jan 63 calls are currently 19.1 percent out-of-the-money with 37 days of life remaining.

Bearish Flow
A large put spread trades in Morgan Stanley (MS) midday Wednesday. Shares touched a morning low of $14.85 on reports one of the company’s flagship real-estate funds has run into trouble and has been forced to return $700 million to investors. However, MS is now up 1 penny to $15.18. Midday options trades on the investment bank include a December 14 – 15 put spread, which was bought for 31 cents, 10,000X. An investor bought the 15 puts for 39 cents and sold the 14 puts at 8 cents, according to a source at the options exchange. If so, it’s a bearish short-term play, as the downside breakeven at expiration (excluding commissions) is at $14.69 (-3.2%) and the contracts expire at the end of this week.

SPDR Basic Materials Fund (XLB) sees high put volume today. Shares are down 10 cents to $32.63. Meanwhile, 91,000 puts and 3,630 calls traded on the ETF. 92,000 put options and 3,700 call options traded in the product so far. The top two trades were part of a spread, in which the investor sold a 24,265-contract block of December 32 puts on XLB at 36 cents to close and bought 21,000 January 31 puts for 95 cents to open. That is, they probably were rolling out a position in December 32 puts, which expire 12/17, and opening a new position in the January 31 puts, which expire in 37 days. The investor might have initiated the spread to adjust a short-term hedge and they are buying downside puts on XLB to help hedge a portfolio of stocks that include names from the Basic Materials sector.

First Solar (FSLR) options volume is running 4X the (22-day) average, with 88,000 contracts traded and put activity accounting for 62 percent of the volume.

Barrick Gold (ABX) options volume is 2X the average daily, with 65,000 contracts traded and call volume representing 52 percent of the activity.

Broadcom (BRCM) options volume is running 2.5X the average daily, with 56,000 contracts traded and call volume representing 69 percent of the total volume.

Increasing options activity is also being seen in Valeant Pharmaceuticals (VRX), Barclay’s Bank (BCS), and SPDR Metals and Mining ETF (XME).

Implied Volatility Mover
Implied volatility in Silicon Graphics (SGI) is moving up amid increasing put volume today. Shares are down $1.97 to $12.06 today after Mark Barrenechea announced his resignation as President, CEO and Board member. Options volume is running 3.5X the daily average, with 2,180 calls and 750 puts traded on the graphics chips designer through midday. December 12, December 14 and March 10 puts are the most actives. Meanwhile, implied volatility in the options on the stock jumped 22 percent to 70.5.

Joe Cusick

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