Where’s the Yellow Flag?

Cusick’s Corner, Thursday January 10, 2013.

No one is waving the caution flag today. The market continues to exhibit strength but tomorrow could be the first true fundamental test when financial heavyweight Wells Fargo (WFC) reports earnings. Financials, XLF, have been the driver the last Quarter, and at this stage the options market is only pricing in a ~.75 move (looking at Weeklys), and Implied Volatility ~21% is on the low end of the range. But as I always say, this is earnings season and one would think that after a ~14% move in the underlying that there might be a little more apprehension. While one stock does not decide the fate of a market, it can set a tone

Market Recap

Stock market averages opened higher, turned mixed through midday, and then strengthened in the final hour Thursday. The underlying tone of trading was positive early after data showed China’s exports quadrupling from November to December. A sharp spike in the euro, which added 1.45 percent to 1.325 against the dollar, at the conclusion of the latest ECB meeting, seemed to help bolster sentiment across global equity markets as well. Oil prices rose 80 cents to $93.9 and gold gained $17.5 to $1673. The domestic economic news was not as cheerful, however, after the Labor Department said that claims increased by 4,000 to 371K last week. Economists were expecting a drop to 364K. Separate data showed Wholesale Inventories up .6 percent in November and .4 percent more-than-expected. The data had minimal market impact and after an early advance at the open, stock market averages were little changed into midday. However, in the final 90 minutes, the broader market advanced and pushed both the Dow and NASDAQ to session highs. At the closing bell, the Dow had tacked on 80 points and the NASDAQ gained 16. The S&P 500 Index (.SPX) rallied 11.1 points to 1472.12 and closed at five-year highs.

Today’s Bullish Trading

Decker Outdoor Group (DECK) has seen two days of increased call activity. As noted in the midday report Wednesday, January 37.5, January 40 and March 40 calls were actively traded on the stock yesterday. In afternoon action today, a noteworthy trade on the footwear-maker was a 9500-contract block of March 45 calls for an average of 37.5 cents when the stock was trading for $36.72. An investor bought the calls, according to a source on the floor. Then, moments later, out of the blue, the stock saw a sudden spike to $37.36 on increasing volume. At the end of the day, 11,163 Mar 45 calls traded on the stock against 2,055 in open interest. Total volume in DECK was about 25,000 calls and 5,000 puts, but with no obvious headlines on DECK to explain the higher volumes or afternoon pop in the stock. Shares finished up 90 cents to $37.02.

Bullish trading was also seen in CBOE Holdings (CBOE), Delta Airlines (DAL), and CBS.

Today’s Bearish Trading

Nokia (NOK) shares rallied 70 cents to $4.45 on heavy volume after the company updated earnings guidance and said mobile phone sales were going well. Options volume on the Finnish device-maker was 5X the daily average, with about 203,000 puts and 173,000 calls traded in the name. Two of the top trades were part of a spread, in which the investor was selling 10,000 January 4.5 puts on NOK and buying 10,000 April 4.5 puts, according to a source on the exchange floor. This Jan – Apr 4.5 put spread, for 48 cents, traded multiple times today and appears to be rolling activity. Open interest in Jan 4.5 puts on NOK is 95,157 and the contract is 5 cents in-the-money heading into next week’s expiration. Some investors were possibly closing out positions as the stock rallied today, but taking new positions in April puts on the view today’s rally will be short-lived. NOK shares dropped more than 4 percent yesterday on worries about competitive pressures after Apple announced plans for a cheaper iPhone.

Bearish trading was also seen in Veeco Instruments (VECO), Molycorp (MCP), and Ann Taylor (ANN).

Index Recap

Some traders showed interest in short-term spread trades on the mini-NASDAQ 100 Index (.MNX) Thursday. MNX finished up 1.65 points to 274.42 after the NASDAQ 100 Index (.NDX) gained 16.53 points to 2,744.18. MNX is equal to 1/10th of the NASDAQ 100. On the options front, the focus was on the January 277.5 – 282.5 call spread on the pint-sized index, which traded 14,400X. For instance, according to data from the exchange, an investor sold 7,918 Jan 277.5 calls on MNX at 29 cents and bought 7,918 Jan 282.5 calls for 4 cents. The spread, at 25 cents, is opening because there not much open interest in the contracts. They’re basically selling the 277.5 calls on the view that MNX will remain below 277.5 through the end of next week (2775.0 for NDX), but hedging that position by purchasing the 282.5 calls. Still, the risks to the trade (relative to the credit collected) are high because the spread could potentially widen to $5, if NDX rallies to 2825.0 or more before the contracts expire.

Analyzing the ETF Market

An impressive put butterfly spread involving 200,000 contracts traded on the iShares Small Cap Fund (IWM) Thursday. Shares were up 20 cents to $87.47 to 52-week highs and one investor did the following: bought 50,000 March 85 puts on IWM for $1.86 per contract, sold 100,000 March 80 puts at 78 cents each, and bought 50,000 March 75 puts for 32 cents. This massive Mar 75 – 80 – 85 put butterfly spread, for 62 cents, is possibly a short-term hedge. That is, the spread was initiated against a portfolio of small cap stocks and will help offset losses if the Russell 2000 Small Cap Index falls over the next two months. The best payoff from the spread happens if IWM shares fall to $80 through the expiration, which represents an 8.5 percent decline over the next 63 days.

Joe Cusick


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