Nice Pop on Low Volume

Cusick’s Corner 07-02-2012

Today was a nice, pre-holiday, light-volume rally, and that is how I am looking at this latest move to the upside. The data, ISM, keeps coming this week, preventing me from trading with total conviction. It might seem like I am talking about more cautious trading before the holiday — well, I am. There continues to be weak data and we are coming up on earnings and if there are revisions on that front, the bulls might have their work cut out for themselves. Overnight action might be dominated by the rate decisions out of Australia and the Bank of England comes out with an early AM decision on rates as well. Tomorrow is a half day.

Market action finished mixed Monday. UK’s FTSE, Germany’s DAX, and France’s CAC 40 all rose more than 1 percent to build on the Friday’s rally. Market averages moved sharply higher in Europe and in the US late last week after EU leaders agreed on new terms for a bailout of troubled banks. The gains across Eurozone equity markets helped set the table for steady trading on Wall Street before domestic economic stats were released. However, early morning gains in the US trading were lost thirty minutes into the session after the latest ISM Index of manufacturing activity showed a decline to 49.7 in June, which was down from 53.5 in May and well below expectations of 52.2. A separate report showed May industrial production up at a better-than-expected .9 percent rate. Most of the focus was on the poor ISM print, however, and the Dow Jones Industrial Average was down 30 points midday. From there, action was range-bound and the Dow trimmed its loss to only 9 points by the closing bell. The NASDAQ erased its midday loss and finished with a 16-point gain.

Bullish
Microsoft (MSFT) lost 3 cents to $30.56 and was one of 15 Dow stocks to finish lower on a day of mixed trading Monday. MSFT, which is an important component of both the NASDAQ and the Dow thirty, traded quietly lower on relatively light volume of 26 million shares. By way of comparison, typical daily volume in Microsoft is 46 million shares. Meanwhile, 63,000 calls and 56,000 puts traded on the stock, which is in-line with the average daily volume. Morning trades on the software giant included a January 25 – 28 put spread, sold at 67 cents, 12000X. The investor sold 12,000 January 28 puts on MSFT and bought 12,000 January 25 puts, possibly closing out a bearish position on the software maker. Later, a large block of 28,000 January 2014 40 calls traded on Microsoft. An investor bought the block for 90 cents per contract, according to source on the exchange floor, and apparently opened a new position. At the end of the day, 30,000 of these long-dated upside calls traded on Microsoft and the flow seems to express confidence in the stock through early-2014.

Bullish trading was also seen in MEMC (WFR), KKR Financial (KFN), and Mannkind (MNKD).

Bearish
Waste Management (WM) saw a flurry of options activity Monday. Shares of the Houston, TX waste management company didn’t do much. The stock finished down 13 cents to $33.27 on relatively light volume of 3.5 million shares. Yet, options volume jumped to 7X the daily average. 25,000 puts and 1,560 calls traded on WM today. August 31 puts were the most actives. More than 10,000 traded. August 30, 32, and 33 puts saw interest as well. It’s not clear what was driving the high put volume, as there were not headlines on the ticker today. But implied volatility was up almost 20 percent to 17, as some players seem to be concerned about a possible decline in the share price between now and mid-August.

Bearish trading was also seen in Coca Cola Enterprises (CCE), Radioshack (RSH), and Qihoo 360 Technologies (QIHU).

Index Trading
Overall options volumes were light today and will probably drop off even more tomorrow. Exchanges are only open a half session Tuesday and closed the entire day Wednesday in observance of the Fourth of July holiday. 435,000 calls and 567,000 puts traded across the S&P 500 Index (.SPX), CBOE Volatility Index (.VIX) and other cash indexes Monday, which is only about 77 percent the daily average, according to Trade Alert data. VIX traded in a narrow range and finished down .28 to 16.80. July 17, 18, and 20 puts on the volatility index were the day’s most actively traded contracts, as some players might view that volatility may remain low through the July expiration, which is 15 days for VIX options. However, Friday’s monthly jobs report does have some market-moving potential before the weekend.

ETF Action
The biggest options trades Monday were in the SPDR Basic Materials Fund (XLB), which lost 18 cents to $35.11, after an investor sold 82,000 September 25 – 29 put spreads on the ETF for 13 cents per spread. In this strategy, the investor sold 82,000 September 29 puts on XLB for 25 cents and bought 82,000 September 25 puts for 12 cents. The spread was possibly closing and might offset positions opened in mid-May, when the same spread was trading for 56 and 58 cents. XLB is up nearly 5 percent since that time and today’s spread trader was possibly closing out a hedge on diminishing concerns about a substantial decline in the basic materials sector between now and mid-September.

Joe Cusick

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