On to the Next Headline 06-28-2012

Cusick’s Corner 06-28-2012
"Buy the rumor, sell the news" — most scenarios that covered the health care law being upheld did not anticipate the market going down, especially the Health Care sector, XLV. So the decision is over, the market is down and now the EU is front and center. The Financials are under pressure, XLF, catalyzed by the fear that JPM’s trading losses may be well north of $2 billion. Energies, XLE -.45%, are also under pressure but are holding up better than the other offensive sectors, XLY, XLK, XLF, which are all down over 1% and could be a buoy going into the After Hours trade.

Stock market averages are lower, as investors digest a hefty dose of news items Thursday. One of the most significant is the landmark Supreme Court ruling that upheld most of the key tenets of Obamacare including the individual mandate that Americans carry health insurance coverage. The news triggered gains across many of the hospital names, but shares of managed care and large commercial insurance companies are mostly lower. Of course, a lot of attention remains overseas where EU leaders started a two-day summit to address the financial crisis. Stock market averages, which saw sharp rallies yesterday ahead of the meeting, saw mixed action across the Eurozone Thursday. The euro lost .3 to 1.243 against the dollar. Crude oil is down $1.49 to $78.72 and gold gave up $23 to $1555.50 an ounce. On the economic front, the news was in-line with expectations. Jobless claims decreased by 6,000 to 386K last week and, separately, first quarter GDP was unchanged at 1.9 percent.

Meanwhile, JP Morgan (JPM) is down 4.5 percent and the biggest loser in the Dow Jones Industrial Average after the NY Times reported the bank’s recently disclosed trading loss might be much larger than previously estimated. JPM is not the only loser in the Dow, however. In fact, all thirty components of the average are under water and the Dow is down 125 points. The NADAQ lost 38.5. CBOE Volatility Index (.VIX) is up 1.14 to 20.59. Overall options volumes are picking up from the slow pace seen earlier this week, with 2.8 million calls and 2.7 million puts traded across all the exchanges through 11:30am ET.

Bullish Flow

Bank of America (BAC) is trading down 15 cents to $7.62 in relatively light volume of 60 million shares. By way of comparison, typical volume in BofA through midday is more than 100 million shares. Yet, calls on the stock are actively traded Thursday. 93,000 call options and 29,000 puts traded in the name so far. July 9 calls are the most actives. 31,860 traded, including a buyer of 9,050 contracts for 4 cents per contract. It might be a closing trade. Yet, another interesting trade in BAC today was in the August options, after an investor sold 5,000 August 7 puts on the stock at 27 cents, bought 5,000 August 8 calls for 36 cents, and sold 5,000 August 9 calls at 11 cents. The three-way spread traded on ISE, where data confirms that the investor sold the puts to buy the call spread and open a new position. If so, the investor is probably a willing buyer of the stock for $7 and is writing $7 puts. They’re also taking a position in the 8-9 call spread to gain bullish exposure in the name.

Lowe’s (LOW), the home improvement retailer, ticked higher early, but has since erased the morning gains and is down 30 cents to $27. The top options trade on the stock is an August 25 – 28 risk-reversal for 28 cents, 2500X on ISE. The investor sold 2,500 August 25 puts on LOW at 46 cents and bought 2,500 August for 74 cents, to open a new position, according to ISEE data. The bullish play comes after a two-month 14.5 percent slide on the stock.

Bearish Flow

HCA shares rallied $2.40 to $29 in heavy trading of 15.6 million shares after the Supreme Court’s landmark ruling sparked a rally in some of the hospital stocks (CYH, THC, HMA). Options on HCA are busy as well. 22,000 calls and 3,420 puts so far. The top trade is a 9,100-lot of September 30 calls at $1.41 on the International Securities Exchange. An investor sold the block, to open a new position, according to data from the ISE. If so, they might see limited upside for the stock beyond these levels and/or they are writing upside calls against stock as part of a covered call play on HCA. 14,500 September 30 calls now traded on HCA.

Puts on Radioshack (RSH) are busy for a second day. August 3.5 puts were the most actives on the electronics retailer yesterday. Shares are down 12 cents to $3.95 today on news the company’s Chief Merchandising Officer quit the company Tuesday. Options volume in RSH through midday is 1,970 puts and 340 calls. August 3.5 puts are again the most actives. August 3 and 4 puts are seeing interest as well. Implied volatility in the options is moving up another 3.5 percent to 69. Looks like downside put buying on concerns about additional losses in the stock.

Unusual Volume

Wellpoint (WLP) options volume is running 4.5X the (22-day) average, with 55,000 contracts traded and call volume accounting for 65 percent of the volume.

United Healthcare (UNH) options volume is 2.5X the average daily, with 44,000 contracts traded and call volume representing for 81 percent of the activity.

Aetna (AET) options volume is running 3X the average daily, with 39,000 contracts traded and call volume accounting for 75 percent of the activity.

Increasing options activity is also being seen in Vertex (VRTX), HCA and Cigna (CI).

Implied Volatility Mover

Implied volatility in the options on WellPoint (WLP) and many other managed care names (CI, AET, HUM, UNH) is falling today after the Supreme Court upheld a provision of Obama’s healthcare law that requires almost all Americans to carry health insurance. The stock is down $4.23 to $65.26 in heavy trading of almost 13 million shares. 43,000 calls and 22,000 puts traded in the name. Meanwhile, implied volatility in WLP options on the stock has dropped 45.5 percent now that this important event risk has passed.

Read more: http://www.xpoundblog.com/2012/06/on_to_the_next_headline_06-28-.html#ixzz1z7Im9pMR
Joe Cusick