Risk Still Off Cusick’s Corner 06-13-2012
This is a market that has held up well in spite of mixed data and headlines every 30 seconds but there still is a sense of risk aversion at this stage. There is some interesting volume action in a few specific names — ZNGA is one of them today and a contrarian might say this is a potential capitulation by the bulls and might be an interesting point to look at the underlying. We have not seen this with the larger indices or names and with the market unable to challenge upside resistance, 1320 & 1350 on the S&Ps, just feels like risk adverse trading might continue. See you After Hours.
Market action is mixed through midday. Disappointing economic data set the table for morning weakness on Wall Street after a report on Retail Sales showed a decline of .2 percent in May, which was in-line with expectations. However, April numbers were revised down to show a decline of .2 percent, from an initial reading of +.1 percent. Meanwhile, the Producer Price Index [PPI] fell 1 percent last month and .3 percent more than expected. Weakness in wholesale prices and retail sales confirm that the domestic economy remains sluggish. Yet, after slipping at the open, the Dow Jones Industrial Average had battled back to positive territory mid-morning with the help of JP Morgan (JPM). Shares are up 2.5 percent after CEO Jamie Dimon appeared before a Senate Banking committee and said, among many other things, he expects his bank to be solidly profitable for the quarter. Strength in the euro, which is up .7 percent to 1.2586 against the dollar, seemed to add some stability to the equity market as well. However, mid-morning gains have been lost and the Dow is now down 22 points. The NASDAQ gave up 3.5 points. CBOE Volatility Index (.VIX) is up 1.49 to 23.58. Overall options volumes remains surprisingly light for a Wednesday ahead of the Quadruple Witch expiration, with 2.8 million calls and 3.2 million puts traded across all the exchanges through 11:45am ET.
Symantec (SYMC) is off 14 cents to $14.43 and has now suffered a 22.8 percent slide since March. Options volume on the security software-maker is running 19X the daily average, being led by a 34,289-contract block of January 17.5 calls traded for 56 cents per contract when the market was 50 to 56 cents. It appears to be an opening buyer. 41,805 January 17.5 calls now traded on Symantec against 25,445 in open interest. The heavy activity in the upside call options might reflect expectations for a move higher in the underlying stock. Rather than buying shares today, some of these options traders might be taking positions in contracts that give the right to buy (or call) the stock for a specific strike price (17.5) through a fixed expiration date (January 19, 2013). A premium is paid to enter the options contract and that premium is at risk if shares hold below the strike price and the position is held through the expiration. The contract can also be closed out, for a gain or a loss, at any time prior to the expiration.
Dendreon (DNDN) has added 47 cents to $6.72 in heavy trading of 9.3 million shares and call options on the biotech are busy today. 15,000 calls and 3,900 puts traded on the stock so far. June 7 calls, which are 4.2 percent out-of-the-money and expiring at the end of next week, are the most actives. 5,830 traded. June 6, July 7, and June 8 calls are busy as well. Implied volatility in the options on the stock is moving up 16 percent to 90. Some investors are possibly looking for the stock to pop after the 80+ percent loss suffered since July of last year. Shares have been under pressure for the past year, as sales of the company’s Provenge cancer drug have not lived up to some expectations.
SPDR Financials (XLF) has added 7 cents to $14.16 and morning options trades on the stock include a July 14 straddle, bought for $1.06, 20000X. In this strategy, the investor bought 20,000 July 14 puts on the ETF for 55 cents per contract and bought 20,000 July 14 calls for 51 cents. The same straddle was being bought Friday and Monday as well. Open interest data indicate that new positions were opened and today’s trades probably add to those positions. If so, it’s not necessarily a bullish or bearish trade, but a view that XLF may see a substantial move higher or lower in the weeks ahead. It’s a volatility play, but time decay is a risk, as both the puts and calls will lose value over time. In order to achieve success in a straddle purchase, the magnitude of the move in the underlying must be sufficient enough to more than offset the negative impact from time erosion. Changes in implied volatility can help or hurt the straddle buyer as well.
Kroger (KR) is off 11 cents to $21.39 and some investors appear to be shopping for puts on the grocery chain ahead of earnings. Kroger releases results tomorrow morning. Options volume is running 4X the daily average. 6,950 puts and 880 calls traded on the stock so far. June 21 puts, which are 39 cents out-of-the-money and expiring at the end of the week, are the most actives. 5,860 traded. Some Kroger shareholders are possibly buying puts to protect shares ahead of the earnings event risk. Or, these might be outright bearish views that the stock will fall before the weekend.
Johnson & Johnson (JNJ) options volume is running 5X the (22-day) average, with 19,000 contracts traded and put volume accounting for 60 percent of the volume.
Gannett (GCI) options volume is 21.5X the average daily, with 14,000 contracts traded and put volume representing for 98 percent of the activity.
Whole Foods Markets (WFM) options volume is running 3X the average daily, with 13,000 contracts traded and put volume accounting for 71 percent of the activity.
Increasing options activity is also being seen in Rambus (RMBS), Illinois Toolworks (ITW), and Sunoco (SUN).
Implied Volatility Mover
Implied volatility in the options on Rambus (RMBS) is up amid heavy volume in the chipmaker today. The stock is up 62 cents to $5.48 on volume approaching 2 million shares, but with no headlines to explain the relative strength and increasing activity in the name. Typical share volume through midday is less than 500,000 shares. Meanwhile, 6,930 calls and 3,800 puts traded in Rambus, which is 6X the daily average, and implied volatility is moving up 33.5 percent to 71.
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