Waiting for EU

Cusick’s Corner 06-26-2012 1:21 PM

Similar to yesterday’s commentary — there are a lot of wild cards at this stage (and I hate reiterating this point), the EU has to come out with some sort of big statement or move (doubt the later) to take some of this pressure off the market. And whether it’s a very bold EU Bond (highly doubtful) or EU bank and insurance watchdog, something of that magnitude needs to come out in order for the bid to potentially start to nibble. Until then the choppy range bound trade could continue in the meantime. See you After hours.

Market action is mixed and the underlying tone of trading remains cautious early Monday. Domestic economic news was in focus this morning after the latest Case Shiller Index showed home prices falling at a 1.9 percent rate in May. A 2.5 percent drop was expected. However, a separate report released later on Consumer Confidence was down to 62 in June, from 64.4 last month and below expectations of 64. Stock market averages wavered a bit on the reading. The broader market also seemed to react negatively to a Reuters headline quoting Germany’s Merkel, saying that Germany will not share liability for longer-term European debt. The comments come two days before the start of a highly-anticipated EU summit among finance ministers. The euro fell .3 percent to 1.2465 against the dollar. Crude oil is off 47 cents to $78.74 per barrel and gold gave up $16.5 to $1572 an ounce. On Wall Street, the Dow Jones Industrial Average has given up early gains and is down 23 points. The NASDAQ added 4 points. CBOE Volatility Index (.VIX) is off .07 to 20.31. Overall options volumes are very light again today, with 2.25 million calls and 2.35 million puts traded across all the exchanges through 11:30am ET.

Bullish Flow

News Corp (NWSA) is up $1.25 to $21.34 in active trading of more than 35 million shares on reports the company plans on spitting in two. News Corp is considering spinning off its publishing business and placing greater focus on its more profitable TV and film units, according to MarketWatch. Shares are up on the news and options volume on the media giant is running 4X the daily average. 10,000 calls and 11,000 puts traded on the ticker so far. July 20 puts are the most actives and some investors might be selling contracts, as 6,500 traded on the day and 86 percent have hit on the bid. If so, the flow might express confidence that the stock will hold above $20 through the expiration and/or these investors are willing buyers (willing to have the stock put to them) at that price. August 21 calls and January 15 puts are the next most actives in News Corp today.

iShares Germany Fund (EWG) has erased early losses and is now flat at $18.70. The tone of trading might take a wait-and-see feel Wednesday ahead of the highly-anticipated summit of EU leaders Thursday and Friday. But in morning options trading Tuesday, an investor bought 5,000 July 19 calls on EWG for 50 cents per contract. A source on the floor confirms the block was bought and the position looks opening. If so, it’s a bullish play targeting a move higher in the Germany’s equity markets through the July expiration, which is in 24 days. It’s possibly a play on the EU summit later this week.

Bearish Flow

Market Vectors Gold Mining Fund (GDX), which tracks the share price action of major mining names, is down 96 cents to $44.20 after gold slipped $16.5 to $1572 an ounce. In options action, a "risk-reversal" was initiated on GDX today after an investor sold 10,000 August 47 calls on the ETF for $1.40 to buy 10,000 August 42.5 puts for $1.57. A source on the floor confirms that puts were sold to buy calls and 17 cents was paid to open a new position. The bearish combo is possibly a short-term hedge. That is, an investor with a large portfolio of mining names might have initiated the position as a short-term "collar" to help mitigate the potential risk of a substantial decline in the sector.

KB Homes (KBH) is up a dime to $8.24 ahead of earnings. The homebuilder is due to report earnings Friday morning. Options volume on the stock is running 3X the daily average, being driven by a July 7 – 8 (2X1) put ratio spread. According to source at the exchange, the investor bought 5,000 July 8 puts on the stock for 42 cents per contract and sold 10,000 July 7 puts at 13 cents. The 1X2, for a 16-cent debit, is possibly closing, as open interest is sufficient to cover in both contracts. If opening, it’s a bearish play targeting a possible move to $7 (-15%) through the July expiration. The debit is at risk if the position is left open through the expiration and the underlying stays above the $8 strike. At that point, all of the puts expire worthless and the premium paid is lost. There is additional risk to the downside with put ratio spreads, because not all of the lower strike puts (which are sold) are covered by the higher strike puts (that are bought).

Unusual Volume
Elan (ELN) options volume is running 2X the (22-day) average, with 16,000 contracts traded and put volume accounting for 89 percent of the volume.

KB Homes (KBH) options volume is 3X the average daily, with 16,000 contracts traded and put volume representing for 94 percent of the activity.

Apollo Group (APOL) options volume is running 5X the average daily, with 21,000 contracts traded and call volume accounting for 53 percent of the activity.

Increasing options activity is also being seen in News Corp (NWSA), Collective Brands (PSS), and Masco (MAS).

Implied Volatility Mover

Implied volatility in the options on Apollo Group (APOL) is down sharply after the for-profit education company posted earnings that topped Street views. APOL is up $2.66 to $35.13 in brisk trading of almost 4 million shares. Options volume is running 3X the daily average, with 16,000 puts and 1,115 calls traded on the stock. Some players might be liquidating bearish put positions on the heels of the news. Implied volatility in APOL options has dropped 36 percent to 38.

Joe Cusick
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