Late-Day Weakness After Fed Decision


Stock market averages slumped in afternoon trading Wednesday after the Federal Reserve concluded its latest meeting and signaled no changes to monetary policy. The decision (or non-decision) had been widely expected and the S&P 500 was up 4.5% in October, new record highs, ahead of the announcement. The modest afternoon decline is possibly a “buy the rumor, sell the news” type reaction to the news. For whatever reason, Treasury bonds are also seeing modest weakness and the yield on the benchmark ten-year Treasury is now 2.53 percent. The other economic news of the day included ADP’s monthly jobs report. The data showed an increase of 130,000 private sector jobs for October and 5,000 more than expected. The earnings news was mixed. While GM, (BIDU), and Gilead Sciences (GILD) are higher in the wake of their respective results, LinkedIn (LNKD), Western Union (WU), and IAC Interactive (IACI) are among the names seeing post-earnings weakness.  Crude oil is down $1.31 to $96.89 on weekly inventory data. Gold erased midday gains and is now off $4 to $1341.50. On Wall Street, the Dow was is down 40 points and 65 points off session lows. With 15 minutes left to trade, the NASDAQ is down 17.

Today’s Bullish Trading

IAC Interactive (IACI), a New York, NY media and Internet company, is down $4.93, or 8.5 percent, to $53 in brisk trading of 9.9 million shares. The stock hit a morning low of $50.14 in the wake of the company’s latest profit report. On the options front, volume in IACI is running 16.5X the daily average. 18,000 calls and 7,400 puts traded on the stock so far. The largest trade printed this morning when a 9,400-lot of January 60 calls traded on IACI for 40 cents per contract when the market was 20 to 40 cents.  14,475 Jan 60 calls now traded on the stock against 4,503 in open interest, as some investors are possibly opening positions in these deep out-of-the-money call on the view today’s decline in the stock is overdone.  November 55 puts are the second most actives in the name. 3,925 contracts changed hands.

Bullish trading was also seen in AOL, American Eagle Outfitters (AEO), and CBS.

Today’s Bearish Trading

Facebook (FB) is in focus after the closing bell. The social media company is due to report earnings and has rallied 42.4% since its last report. The stock is down 32 cents to $49.07 in active trading of 69 million shares ahead of the results Wednesday. 512,000 calls and 304,000 puts traded on the stock. The largest trade is a 37,500-contract block of November 70 calls at 11 cents per contract. Open interest at that strike is 75,441 and so the activity is possibly liquidating or closing. The next biggest trades are part of a bearish combination play, in which the investor was selling 20,000 June 52.5 calls on FB at $6.45 and buying 20,000 June 45 puts for $5.25. The Jun 45 – 52.5 bearish risk-reversal, at $1.20, appears to be a new position (as volume exceeds open interest in both contracts) and maybe part of a “collar” or hedging strategy against stock for fear that Facebook shares might see a negative reaction to the profit report.

Bearish trading was also seen in Toll Brothers (TOL), BioMarin Pharmaceuticals (BMRN), and Paccar (PCAR).

Index Recap

PHLX KBW Bank Sector Index (.BKX) is flat at 65.04 and a 7000-contract block of Dec 66 calls is sold on the index at 95 cents per contract. The activity will create the largest block of open interest in the bank index and seems to be expressing the view that BKX will see limited upside through mid-December. The index tracks the price action of roughly two dozen leading banking names and the increased options activity today is maybe a portfolio manager selling the calls against a basket of financial names as part of a call writing strategy. The index is up 26.8 percent year-to-date, but most of the gains were recorded in the first half of 2013. BKX is at the same levels today as it was in mid-June.

Analyzing the ETF Market

Market Vectors Semiconductor Fund (SMH) sees two days of increased put activity. One player bought 5,000 February 38 puts on the ETF for 95 cents per contract Tuesday, according to a source on the exchange floor. Today’s open interest numbers indicate a new position was opened. Shares are down 22 cents to $41.03 late-Wednesday and a 12,000-contract block of February 34 puts is sold on the ETF at 25 cents per contract. Open interest at that strike is 14,486 and so today’s activity is possibly closing. The two days of activity might be the work of one player. While they are closing out Feb 34 puts, which are now more than $7 out-of-the-money, they are opening a new position the Feb 38 puts. Since SMH holds shares of leading semiconductor and semiconductor equipment companies, the interest in Feb puts on the ETF is possibly part of a portfolio hedging strategy against positions in a basket of chip stocks.