Something to Think About

Cusick’s Corner October 24, 2012.

The Fed stays status quo on their stance, no surprise, and the longs that are in the market did not flinch into the announcement or the close and that was a little surprising. This is a tough trading climate right now and with the S&Ps right at the 1400 level, there seems to be a coiled spring that is shifting to potential strength to the bears. Now this might be easy to say because so far this month we have basically given back almost the entire September rally, and this latest stance to hold the bid seems more of the old guard holding their ground than a new group of longs joining the fight. If a strategist is looking at a market/equity and bearish on direction and view volatility as being high, then out-of-the-money puts spreads could be an interesting strategy to potentially elect in this environment. Tomorrow could continue the volatility with Claims and Durable Orders pre-market; any disappointment could put potential pressure on the market that could catalyze the bears.

Market Recap

Stock market averages fell, as Federal Reserve officials failed to assure investors that they have enough arrows in the quiver to help jump start the fragile economic recovery. Market action was mixed through midday with a wait-and-see feel ahead of the interest rate announcement from the Federal Reserve. The statement, released at 2:15pm ET, rehashed the same concerns about the economy and included pledges that QE3 would continue. Yet, Fed officials also noted signs of inflation and fell short of offering an expanded Quantitative Easing strategy. Market averages, which were basically flat ahead of the news following a round of mixed earnings reports, wavered a bit on the headlines, and then dipped into the final hour. The other economic stat of the day was New Home Sales; which showed improvement to a 389K annual rate for September, up from 368K and slightly better than the 389K that was expected. Crude oil prices slipped again, losing $1 to $85.67, on the heels of weekly inventory data. Gold lost $7 and is now at $1702.5. On Wall Street, the Dow Jones Industrial Average lost another 26 points and the NASDAQ dropped 8.8 points.

Today’s Bullish Trading

Aetna (AET) might be a name worth watching tomorrow. The health insurance company is due to report earnings before the opening bell and has seen two days of increased options action ahead of the report. On Monday, we noted in the midday report that AET saw increased interest in its November 45 call options early in the week. Shares gained 29 cents to $43.95 and the activity resumed today. About 37,000 calls and 6,500 puts traded on Aetna Wednesday. November 45 calls were again the most actives. 16,600 contracts changed hands. December 45, December 49, December 48, and December 50 calls were the next most actives. It’s not clear what is motivating the high volume in November and December upside calls on AET. Maybe some investors are taking positions in anticipation of good news when the company reports results tomorrow morning.

Bullish trading was also seen in Patterson Energy (PTEN), Cliffs Natural Resources (CLF), and Dow Chemical (DOW).


Today’s Bearish Trading

Nuskin (NUS) shares sank intraday to a low of $40.02 and finished down $2.17 to $41.46 in active trading of 2.2 million shares, but with no obvious headlines to explain the volatility Wednesday. The stock was down and put volume picked up in the stock, with about 8,000 contracts traded. The flow included a 2,344 contract block of December 40 puts for $3.50 per contract and another 2,000 for $3.20. At the end of the day, 5,850 December 40 puts had traded in NUS and implied volatility rose 4 percent to 62. Some investors might have been rattled by the abrupt drop in the stock price and bought puts to help hedge the risk of further losses until the volatility subsides. The company is due to report earnings on October 30.

Bearish trading was also seen in Navistar (NAV), Qihoo Technologies (QHOO), and Time Warner Cable (TWC).


Index Recap

The S&P 500 Index (.SPX) lost 4.36 points to 1,408.75. The index is down in four of the past five days for a one week 3.6 percent losing skid. Yet, while the market is moving lower, the uptick in volatility doesn’t seem to have stirred up much bearish sentiment so far. In the index market today, for example, only 447,000 calls and 452,000 puts traded on SPX, CBOE Volatility Index (.VIX), and other cash products; which is 70 percent the daily average volume, according to Trade Alert data. VIX dipped .50 to 18.33. If bearish sentiment were truly on the rise, it seems that there would be greater demand for index put options and a subsequent move higher in the volatility index. VIX tracks the expected volatility priced into SPX index options and is sometimes called the market’s “fear gauge” because it spikes during times of panic on Wall Street.

Analyzing the ETF Market

While there are few signs of hedging activity in the index market today, options on the SPDR 500 Trust (SPY) saw large block trades, with one big investor possibly looking for the market to make another fall before the December expiration. SPY is an exchange-traded fund that holds the same stocks as the S&P 500 and finished the day down 40 cents to $141.02. In options action, a large five-way spread was initiated on the ETF after an investor sold 30,000 January 115 puts on SPY, 25,000 Jan 116 puts, and 5000 Jan 117 puts to buy 50,000 Dec 110 puts and 120,000 December 115 puts. $1 million was paid for the entire trade. Looking at trade history and open interest in the contracts, suggests a possible roll. That is, the investor was selling the Jan puts to close while opening a new hefty position in downside December puts on SPY.

Joe Cusick

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Joe Cusick

Joseph Cusick is currently Vice President of Wealth and Asset Management at MoneyBlock. Joseph is passionate about marrying his 20 years of market experience and the powerful tools at MoneyBlock with the goal of empowering wealth managers with the tools to better manage and grow their business. Joseph was previously the Senior…