Rather Trade Than be a Weatherman

Cusick’s Corner – March 5, 2013

The bulls held control into the After Hours but it was not a slam dunk that would continue into tomorrow’s session. We did start to get some choppy trade, albeit at the third level of resistance, it still got choppy. I said that I was watching Energies, XLE, and I saw specifically Crude, USO, come off its highs late in the session. This segment (like the rest of the market) looks like it has some continuation power to the upside but resistance is much firmer at these levels compared to what we have seen in the last two sessions. This was a strong up day, one not to be faded at this stage, but do not get to complacent while the VIX is at 13.48. See you Midday tomorrow after the big dig out here in Chicago

Market Recap

Stock market averages held solid gains midday and finished higher Tuesday. Economic news helped after a report released this morning showed the ISM Services Index up to 56 for February, from 55.2 last month and better than the 55.4 that was expected. Stock market averages had already recorded gains ahead of the data and seemed to find support from action in overseas markets. Most of Asia’s equity markets finished higher and key stock benchmarks across the Eurozone were up more than 2 percent – 4 ½ year highs. Crude oil prices are ticked 55 cents higher to $90.67 and gold gained $2.5 to $1575. On Wall Street, the rally continues. The Dow Jones Industrial Average added 126 points and finished at record highs. The NASDAQ rose 42 points and to multi-year highs.

Today’s Bullish Trading

Hecla Mining (HL) saw high call volume for a second day. The stock was down 57 cents to $4.07 in active trading of 16.5 million shares Monday on news the company is acquiring Aurizon for $796 million (Canadian dollars). About 34,000 calls and 19,000 puts traded on the Coeur D’Alene, ID gold and silver mining company yesterday and the flow created 17,558 in new open interest in the June 5 calls. With 19,932 in total OI, the June 5 call is now the largest block of open interest in the name. The action continued today. Another 11,632 contracts changed hands. Most of the flow was in smaller sizes. The top trade was a 500-lot for 14 cents per contract when the market was 12 to 14 cents. It’s not clear what is motivating the action, as the stock was down another 6 cents to $4.01 Tuesday. Some investors are possibly taking positions on the view the recent drop in HL creates an opportunity to get long the stock. Rather than buying shares outright, they’re taking positions in contracts that lock in the right to buy (call) the stock for $5 through the June expiry.

Bullish trading was also seen in Peabody Energy (BTU), Juniper Networks (JNPR), and Safeway (SWY).

Today’s Bearish Trading

Cardinal Health (CAH), a Dublin, OH medical supplies and pharmaceutical company, was up 3 cents to $46.28 and put options on the stock saw unusually high volume Tuesday. 14,000 puts and 1,100 calls traded on the stock, which is 12X the daily average for the name. The top trade was a 5,000-lot of April 45 puts for 75 cents per contract on the International Securities Exchange. An investor bought the puts, to open, according to data from the all-electronic ISE. At end of the day, 11,000 April 45 puts traded on CAH against just 27 contracts in open interest. It’s not clear what is motivating the action. Some shareholders might be initiating protective put positions after a 13.7 percent year-to-date gain in the stock.

Bearish trading was also seen in Olin (OLN), Big Lots (BIG), and Marriott (MAR).

Index Recap

Trading was active in the index market. 891,000 calls and 988,000 puts traded on the S&P 500 (.SPX), CBOE Volatility Index (.VIX), and other cash indexes, according to Trade Alert data. SPX rallied 14.59 points to five and a half year highs of 1,539.79. VIX, which tracks the expected volatility of SPX options, dropped another .53 to 13.48 after falling 1.35 points yesterday. Indeed, implied volatility was broadly lower across the options market today. For instance, Nasdaq Volatility Index (.VXN) dropped .79 to 14.60, Oil implied volatility, as measured by OVX, lost 1.87 to 22.41, and implied volatility in Goldman Sachs options, VXGS, was down 2.06 to 27.93.

Analyzing the ETF Market

Dow Jones DIAMONDS (DIA) exchange-traded fund saw more volume than usual. Shares gained $1.27 to $142.34 and moved to new record highs along with the Dow Jones Industrial Average. DIA is a fund designed to mirror the performance of the Dow (divided by 100), although the relationship isn’t always perfect. On the options front, 59,000 calls and 61,000 puts traded on DIA today. The top trades were part of a spread. An investor sold 8,446 March 143 calls on DIA at 63 cents per contract and bought 8,446 Mar 145 calls at 8 cents. That is, the Mar 143- 145 call spread was sold on the ETF at 55 cents, 8446x. It was an opening trade, according to data from the exchange, and seems to be expressing the view that the upside for the Dow is limited through the March expiration, which is at the end of next week.

Joe Cusick


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