Fed Watch 08-01-2012

Cusick’s Corner, Wednesday 08-01-2012 12:43pm CDT by Joe Cusick

It looks as though many traders might be sitting on their hands, awaiting the FOMC statement. There is now pressure on the Fed; the statements last week have been a catalyst for the market, S&P’s +9%. Energy markets, XLE, continue to be catalyzed on multiple fronts before the Fed, with the draw on the Inventories in the Crude markets, USO, much greater than anticipated. There also is escalating fighting in Syria which continues to pressure the Energy markets to the upside. By 2:15pm ET many traders probably won’t be sitting on their hands — so get ready. See you After Hours.

Employment data helped set the table for morning gains on Wall Street, but trading has turned mixed midday ahead of the FOMC’s interest rate announcement. Before the opening bell, ADP reported that the US economy added 163,000 private sector jobs last month. The number was almost 40,000 better-than-expected and comes ahead of the Labor Department’s widely-watched report Friday morning. The day’s other economic stats, released later, were less bullish. ISM Index for manufacturing was up to 49.8 in July, from 49.7 last month and below expectations of 50.1. Construction spending increased by .4 percent in June and .1 percent less-than-expected. Trading was whippy around the data and now the focus turns to the Federal Reserve Open Market Committee rate announcement due out at 2:15pm ET. While no changes in rates are expected, investors will scrutinize the post-meeting statements for signs of further Quantitative Easing to help the sluggish economy. Trading was mixed in Europe ahead of tomorrow’s ECB rate announcement, with France’s CAC 40 gaining .8 percent and Germany’s DAX losing .5 percent. The euro is not much changed at 1.23 against the buck. Crude oil ticked 40 cents higher to $88.45. Gold lost $8.5 to $1606 an ounce. On Wall Street, the Dow Jones Industrial Average is holding a 34-point gain, but the NASDAQ lost 2.8 points. CBOE Volatility Index (.VIX) is off .42 to 18.51. Trading in the options market is a bit lighter-than-normal, with about 2.9million calls and 2.8million puts traded across all the exchanges through 11:30am ET.

Bullish Flow
Green Mountain Coffee Roasters (GMCR) is off 32 cents to $17.95 and options on the stock are active heading into earnings. The company is due to release results after the closing bell and tends to see big post-earnings moves. The average daily price swing during the past four quarters (on the day after GMCR releases results) is 29.2 percent! The stock sank 47.8 percent on 5/3 when earnings were last reported. It appears that some players in the options market are possibly bracing for another big move, as 20,000 calls and 15,000 puts traded on GMCR so far. The top trades are part of a spread, in which the investor apparently bought 2,500 Weekly 20 calls on GMCR for $1.17 and sold 2,500 Weekly 24 calls at 22 cents. The spread, for a 95-cent debit, will expire worthless if shares hold below $20 and the position is left open through the expiration. The best case scenario for the position is GMCR rallies to more than $24 and the spread widens to $4 before the weekend (expiration). The breakeven of a call spread at expiration is equal to the lower strike plus the debit, or in this case, $20.95 (plus transaction costs).

The largest options trades so far today are in the SPDR Gold Trust (GLD). Shares, which represent ownership in the actual metal stored in bank vaults, are off 74 cents to $155.75 after gold slipped $7.5 to $1607 an ounce. The big options trades in the ETF are part of a spread, in which the investor bought 25,000 November 180 calls on GLD for $1.17 and sold 25,000 November 210 calls at 25 cents. The spread, for a 92-cent debit, seems to be an aggressive play on gold, which a max payout if GLD is trading for $210 or better by the November expiration.

Bearish Flow
Trading is mixed and CBOE Volatility Index (.VIX) is off .42 to 18.51, but there appears to be evidence that some investors are hedging their views with options today. SPDR 500 Trust (SPY), which is the exchange-traded fund designed to mirror the S&P 500 Index, is up 74 cents to $138.46. Meanwhile, the four most actively traded options contracts across all stocks, ETF, and indexes in today’s session are downside puts on the SPY. August 134s are the most actives. Volume is approaching 60,000. Weekly 138 puts, which expire 8/3, are the second most actives after 47,000 traded. Aug 136 and Weekly 137 puts on SPY are the next most actives. Investors will sometimes buy near-term downside puts on SPY to hedge short-term event risk, which this week includes earnings reports, employment data and Central Bank meetings in the US and Europe.

Focus Media (FMCN) is down 75 cents to $19.03 on light volume of 596K shares. The activity is less than half the normal for midday, which is 1.2 million shares. Yet, put volume is running 4X the daily average. 8,350 contracts traded and the flow is heavily concentrated in the August 17 puts on the Chinese media company. More than 8,135 traded and, with 65 percent of the trades hitting at the offer or asking price, it appears that put buyers are driving the flow in FMCN Aug 17 puts. The contract is 10.7 percent out-of-the-money and expires in two and a half weeks. No news to explain the relative weakness and bearish trading activity in FMCN Wednesday.

Unusual Volume
Deere (DE) options volume is running 3X the (22-day) average, with 38,000 contracts traded and call volume accounting for 54percentof the volume.

Radioshack (RSH) options volume is 4.5X, the average daily, with 36,000 contracts traded and call volume representing for 69 percent of the activity.

DuPont (DD) options volume is running3X the average daily, with 35,000 contracts traded and call volume accounting for 51 percent of the activity.

Increasing options activity is also being seen in Pepsico (PEP), Herbalife (HLF), and MEMC (WFR).

Implied Volatility Mover
Implied volatility in the options on Knight Capital (KCG) is up sharply today amid a falling stock price and high options volume. Shares are down $2.09 to $8.24 and 38,000 options traded on the market-making firm. By way of comparison, average daily volume in KCG is less than 300 contracts. The flow includes 31,000 puts and 7,000 calls. Implied volatility surged more than 200 percent to 122. There are reports of a glitch at a trading firm on the NYSE this morning, which appears to be the catalyst for the jump in volume and volatility in KCG today. CNBC is reporting that Knight (trades) occurred at its market-making unit and affected 150 stocks.

Joe Cusick
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