Still Keeping the Powder Dry – After Hours

Cusick’s Corner 02-20-2013

Volatility, VIX, popped today, moving to make up most of the pullback over the last month, VIX +17.2%. This has most market participants on watch and some players (the weaker hands on the long side) might be taking profits in the highfliers. Bonds did bounce today off the overnight lows, so the yields came off their highs. This move did not damage the current trend and to be clear this only put longs on alert, but if you look at the canary in the coalmine, the Small Caps, IWM, are still in the uptrend. There is going to stress if we break support, $89 on the IWM, which could be a potential opportunity. Watch the data tomorrow, Claims/CPI/Home Sales/ & Crude Inventories.

Stock market averages fell in morning action on housing data and remain in the red late-Wednesday. Equity markets were mildly higher across much of Asia overnight, but mixed in Europe ahead of the opening bell on Wall Street. The domestic economy was also in focus after a report showed Housing Starts at an annual rate of 890K for January, which was down from 973K and below expectations of 914K. Separately, PPI, a gauge of inflation at the wholesale level, printed at .2 percent and mostly in-line with expectations. Earnings news was mixed. While Herbalife (HLF) and Toll Brothers (TOL) are lower on the heels of their reports, MGM and DELL ticked a bit higher. There’s some volatility in the commodities markets, as crude oil shed $2.05 to $95.05 and gold tumbled $33.5 to $1570.50. Minutes from the January FOMC meeting also drew some interest this afternoon, as Fed officials largely stuck to the same script, but said that they might make changes to QE3 at the March meeting. On Wall Street, the Dow Jones Industrial Average is now down 20 points. With 90 minutes left to trade, the NASDAQ is down 22.

Joy Global (JOY) has seen a flurry of options activity Wednesday. The stock is up $3.31 to $66.85 in heavy trading of 7.45 million shares after the company’s Chief Executive Officer responded to recent takeover talk surrounding the company at an investor conference. CEO Michael Sutherlin stated that Joy will “do the right thing for shareholders,” according to Bloomberg. The comments were apparently sufficient to spark a rally in shares of the Milwaukee-based machinery company and options volume on the stock is running 4X the daily average. 25,000 calls and 14,000 puts traded in the name so far. March 65, March 70 and March 72.5 calls are among the most actives and 30-day implied volatility in JOY is moving up 13 percent to 43.

Bullish trading was also seen in Vodafone (VOD), Wendy’s (WEN), and Medicines Company (MCO).

Anglogold (AU) drops $1.22 to $25.51 and new 52-week lows amid weakness in the mining names after gold suffered another big loss Wednesday. The price of the precious metal shed $26 to $1578 and dropped to levels not seen since the middle of the summer. AU, a South African mining company, is trading down along with the metal and options volume on the stock is 10X the daily average. 30,000 calls and 2,800 puts traded on the stock. The top trades are part of a spread, in which the investor bought 2,500 April 34 calls, bought 7,000 April 33 calls and bought 3,000 Apr 31 calls, while selling 7,000 June 28 calls on AU. Looking at open interest, the activity appears to be rolling. That is, the investor was short the April contracts and is covering the position, while now writing June calls with a lower strike price to open a new position. A shareholder with a position in the stock might have initiated the trades to adjust a covered call strategy in the name. 13,790 June 28 calls have now traded on the gold miner against 69 in open interest.

Bearish trading was also seen in First Energy (FE), Forest Oil (FST), and Golden Minerals (AUMN).

Index Trading
Implied volatility in the options market is moving mostly higher Wednesday. CBOE Volatility Index (.VIX), which tracks the expected or implied volatility priced into S&P 500 Index (.SPX) options, closed at five-year lows yesterday. VIX is up 1.03 points to 13.34 late-Wednesday. VXN tracks the IV of NASDAQ 100 Index (.NDX) options and is up .66 to 14.08. There’s been some rather big moves in implied volatility in the options on the US Oil Fund (USO) and SPDR Gold Trust (GLD). OVX, which tracks the oil fund IV, is up 1.76 points to 24.20. GVZ tracks the implied volatility of GLD options is up 1.50 points to 17.25.

ETF Action
Today’s market decline seems to have stirred up a bit more put activity in the SPDR 500 Trust (SPY) which is an exchange-traded fund that holds the same names as the S&P 500. Shares are off 81 cents to $152.44 and total options volume is 1.05 million puts and 515,000 calls, a ratio of almost two-to-one. Weekly 150 puts that expire on 3/1 are the most active. Volume is approaching 97,000 contracts. The contract expires on March 1, which coincides with the government’s deadline to avoid “sequester”, or the $85 billion in spending cuts. Some investors are possibly buying the 150 puts on Spiders to hedge the risk of further market declines ahead of the event risk.

Joe Cusick

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