Ugly by Joe Cusick June 1, 2012 3:15 PM

June 1, 2012

Cusick’s Corner
You can read about the Jobs data below and while it was not a horrible number, it was well below expectations, placing all the major indices under pressure. Right now, most indices and sectors are retracing about 38% of the October through May peak. You are also seeing the leading sectors, Consumer (XLY), Financials (XLY), which have been the laggards over the last few weeks with still no buying pressure at this stage. Here’s what some traders are still waiting for — when will the buyers start to bite? What is not helping buyers step up is a crumbling Crude market. While cheaper oil would signal potentially lower prices on petroleum products, it is a negative for economic growth and with the stress already apparent globally (look at Cooper), the Bulls are under pressure. See You After Hours.

Poor jobs data added to investor anxiety levels Friday. The Labor Department reported this morning that the US economy added only 69,000 jobs in May. Economists were expecting a gain of 150,000. The unemployment rate edged up to 8.2 percent and .1 percent more than expected. Hourly earnings rose .1 percent and .1 percent less than expected. The day’s other data didn’t help. Construction spending was up .3 percent in April and .2 percent less than expected. ISM Manufacturing showed a decline to 53.5 and .5 below expectations. Trading was volatile overseas as well. While Japan’s Nikkei lost 1.2 percent and paced an advance across Asia, Germany’s DAX took a 3.4 percent hit and France’s CAC 40 lost 2.2 percent. The Dow Jones Industrial Average fell on the data and has failed to stage any meaningful rally attempts. The Dow is down 200 points. The NASDAQ gave up 60. CBOE Volatility Index (.VIX) has added 1.31 points to 25.37. Trading in the options market is active and reflects the cautious underlying tone. 4.5 million calls and 4.8 million puts traded across all the exchanges through 11:45am ET.

Bullish Flow
Halliburton (HAL) is off 6 cents to $30 and moving off of session lows of $29.17 through midday. Options order flow on the oil driller is interesting, as 41,000 calls and 9,200 puts traded in the name. Morning trades in Halliburton include a buyer of 19,000 January 36 calls for $1.55 per contract. The hefty block of calls traded on AMEX, where a source confirms the options were bought. The contract is 23.4 percent out-of-the-money and has less than 10,000 in open interest. So today’s buying appears to be a new bullish position in the stock. HAL lost 12.2 percent in May and is nearly 50 percent below the levels seen in the summer 2011. Some investors might be expecting a rebound, but rather than buying shares outright today, they are taking positions in option contracts that give the right to buy (or call) the underlying shares (100 shares per option contract) for a set price (strike price) for a specific period of time (expiration). Time decay is a risk when buying longer-term calls and the contract can expire worthless, resulting in a loss of any premium paid, if the underlying stays below the strike of the call and the position is left open through the expiration. If bought, a contract can also be closed out (by selling it for a gain or loss) any time prior to the expiration through an offsetting position.

SPDR Gold Trust (GLD) is up $4.85 to $156.47, as a weaker dollar and flight-to-safety seem to be giving the yellow metal a lift Friday. Gold was recently up over $50 to $1613 an ounce. One player in the options appears to be anticipating additional gains in the metal, as a July 157 – 172 call spread was bought on the ETF for $3.80 per contract, 13000X. In this position, the investor bought 13,000 July 157 calls on GLD for $4.85 and sold 13,000 July 172 calls at $1.05, which creates a bullish position with a max payout if shares rally to $172 or more though the expiration, which represents a roughly 10 percent move higher in gold over the next 7 weeks.

Bearish Flow
Trading is very heavy in the SPDR 500 Trust (SPY) today. The ETF, which holds the same names as the S&P 500, is off $2.37 to $129.10 in heavy trading of more than 102 million shares. 1.3 million puts and 974,000 calls already traded on the fund. The projected volume of more than 4.5 million is almost double the daily average for the product, according to Trade Alert data. The top trade is a 33,000-contract block of June Quarterly 120 puts for $1.04 per contract in the early minutes of trading Friday. The block, representing $3.43 million in premium, is probably a defensive position or short-term hedge. The contract is 7.1 percent out-of-the-money and expires at the end of the month (which corresponds with the end of second quarter).

Tibco Software (TIBX) shares are down and put volume is picking up in the software-maker today. The stock is off $1.03 to $25.72. Options volume on the stock through midday is 7,500 puts and only 338 calls. June 26, 27 and 28 puts are the most actives. It’s not clear what is driving the flow, as there are no headlines on the ticker today. Nevertheless, implied volatility in the options on the stock is up 9.5 percent to 50 and some investors seem to be bracing for additional losses in the underlying shares over the next two weeks. June options expire in 14 days.

Unusual Volume
Pioneer Natural Resources (PXD) options volume is running 13X the (22-day) average, with 53,000 contracts traded and call volume accounting for 99 percent of the volume.

Tyco (TYC) options volume is 18X the average daily, with 27,000 contracts traded and call volume representing for 57 percent of the activity.

International Game Technology (IGT) options volume is running 9X the average daily, with 24,000 contracts traded and call volume accounting for 58 percent of the activity.

Increasing options activity is also being seen in Sara Lee (SLE), KB Homes (KBH), and Omnivsion Technology (OVTI).

Implied Volatility Mover
CBOE Volatility Index (.VIX) has added 1.31 points to 25.37 and is poised to see its highest close so far in 2012. The index is up more than 20 percent in just three days and moving above the May 18 closing high of 25.1. Trading in the VIX pit is active today as well. 198,000 calls and 56,000 puts traded on the index so far today. June 25, June 35, July 30, Jun 40 and July 40 calls are the most actives, as nervous investors appear to be taking positions in calls on the VIX amid concerns about another short-term spike in market volatility.

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Joe Cusick

June 1, 2012 3:15 PM