Tight Range Continues

Cusick’s Corner

The tight range continues into the Fed tomorrow but the overall trend continues to be owned by the Bulls. The Large and Small Caps, SPY & IWM, continue to run to new highs. Here’s a sector that has exhibited some impressive upside momentum — Housing, along with these two groups ITB & XHB, the moves today have broken to the upside through channel resistance. So as these resistance points are broken, we need to watch these levels to see if they now start to act as support. All eyes and ears will be on the Fed tomorrow — so stay tuned.

Market Recap

Stock market averages finished with modest gains ahead of tomorrow’s Federal Reserve interest rate announcement. While the Fed isn’t expected to change rates, investors will scrutinize the Fed’s post-meeting statement and comments from Chairman Bernanke for signs officials are ready to implement another round of quantitative easing. The tone of trading was choppy today and had a wait-and-see feel ahead of the headline event. Economic data will also be a factor, as PPI and Jobless claims are due out Thursday morning. Friday holds a host of data, including CPI, retail sales, and industrial production. Today, stock market averages opened a bit higher after European equity markets were steady on news a German court ruled that the European Stability Mechanism is allowed under the German constitution and did not need a referendum to pass. The euro was up .3 percent to 1.2895 on the buck Wednesday and is at five-month highs. Crude oil prices slipped 30 cents to $96.87 and gold was little changed at $1735. Stock market averages finished with modest gains. Both the Dow Jones Industrial Average and the NASDAQ added roughly 10 points.

Today’s Bullish Trading

Electronic Arts (EA) saw an afternoon spike and finished up 18 cents to $13.99 in heavy trading of 9.4 million shares after the company presented at Apple’s iPhone 5 event and demoed EA’s new racing game. (AAPL shares saw volatile trading and finished up $9.20 to $669.79 after unveiling the details of its latest phone and offering stats on sales of existing products.) In Electronic Arts options action, 9,450 calls and 1,950 puts traded on the stock. Much of the volume surfaced in the afternoon session when the company was presenting at the Apple event. September 14 calls, which are now at-the-money and expiring in 9 days, were the most actives. 4,550 contracts traded. Another 2,050 of the September 15 calls on EA changed hands Wednesday.

Bullish trading was also seen in Southwest Energy (SWN), MGIC (MTG), and Radian (RDN).

Today’s Bearish Trading

Verizon (VZ) shares were up 65 cents to $44.89 and the best gainers in the Dow Jones Industrial Average after the company offered an update at a Bank of America/Merrill Media and Communications conference. The stock was moving northward and options volume was 2.5X the daily average. 38,000 calls and 55,000 puts traded on Verizon today. November 44 puts saw the most volume. More than 28,000 contracts traded. Most of the activity surfaced midday and it appears that one or more investors were building a position in the contract. 1,500 traded for $1.29 per contract when the market was $1.26 to $1.29, another 1,000 traded for $1.27 when the market was $1.25 to $1.27, 658 more traded for $1.21 when the bid-ask was $1.19 to $1.21, and so on. It’s not clear what was motivating the action, because the stock was heading higher and there doesn’t appear to be any bearish headlines on the ticker today. VZ is on a five-month 22 percent run higher. Some shareholders are possibly buying $44 puts on the stock to help hedge the gains.

Bearish trading was also seen in Arch Coal (ACI), Nationstar Mortgage (NSM), and Royal Bank of Canada (RY).

Index Recap

Trading slowed a bit in the index market after reaching high levels yesterday, but trading remained active Wednesday. More than 2.1 million contracts traded on the S&P 500 Index (.SPX), CBOE Volatility Index (.VIX) and other cash indexes Tuesday. The activity was led by a record one-day volume of 1.22 million contracts in the VIX pit. 740,000 calls and 582,000 puts traded in the index market Wednesday. The S&P 500 added 3 points to 1,436.56 and VIX, which tracks the expected volatility priced into SPX options, gave back .61 to 15.80. 390,000 calls and 156,000 puts traded on the volatility index today. VIX October 30, November 28, and February (yikes) 55 calls were the most actives.

Analyzing the ETF Market

SPDR Homebuilder ETF (XHB) added 48 cents to $24.87 and is setting new 52-week highs after rallying 18.3 percent since July. Options volume on the ETF, which represents ownership in a basket of homebuilding names, was 2X the daily average. 17,000 puts and 3,450 calls traded in XHB today. The flow was heavily concentrated in January 20 puts. 14,000 traded, mostly in smaller sizes. The top trade was a 2000-lot for 45 cents per contract when the market was 42 to 45 cents. Open interest in the XHB Jan 20 puts, which are almost 20 percent out-of-the-money and expiring in 128 days, is 18,900 contracts. So, the flow might be closing. That is, the investor is buying back a short put position after the big gains seen in XHB lately.

Joe Cusick