Market Tricks or Treats 10-29-2010

Cusick's Corner
Trick or Treat! No real action today – market participants were on the sidelines today, stuffing themselves with candy as they wait to see what Halloween costumes come knocking on the door next week. Traders are waiting on Tuesday's elections and the Fed's QE2 plan. Will it be a trick or will it be a treat? See you Monday.

Major averages finished mixed and little changed Friday. Economic data was in focus early after a report showed Gross Domestic Product [GDP] increasing at a 2 percent annual rate in the third quarter, which was in-line with economist estimates. A separate report released later showed the Chicago PMI of manufacturing activity to 60.6 percent in October, which was up from 60.4 last month and ahead of the 58.0 that economists had predicted. Finally, the University of Michigan Consumer Sentiment Index was released at 9:55am ET and showed a decline to 67.7 in October, from 67.9 and a little less than economist estimates of 68. At the end of the day, the data seemed to be a wash and the Dow Jones Industrial Average was flat into midday. From there trading slowed and, at the closing bell, the Dow was up just 4 points. The NASDAQ gave up early gains and finished flat. The CBOE Volatility Index (.VIX) edged up .40 to 21.28 ahead of important events next week including mid-term elections, a Fed meeting, and monthly jobs data.

Bullish Flow
IStar Financial (SFI), a New York-based Real Estate Investment Trust [REIT], rallied and options order flow turned bullish Friday, the day after the company announced earnings and said it is repaying $1 billion in debt sooner than previously expected. Shares are up 33.2 percent over the past two days and finished Friday with a 50-cent gain, to $4.57. Meanwhile, options volume included 8,800 calls and 1,060 puts traded. December 6 calls were the most actives. 2,300 traded and, of that volume, 95 percent traded at the ask. December 5 and April 4 calls were busy as well, as some players appear to be buying premium on hopes for additional upside in the weeks ahead.

Bullish options action was also seen in Alcoa (AA), Iron Mountain (IRM), and Coinstar (CSTR).

Bearish Flow
Research In Motion (RIMM) had a good week. Shares finished up 71 cents to $56.92 and rose every day this week. RIMM finished up 16.1 percent from last Friday's closing levels and the 5-day rally in the stock seems to reflect optimism for Blackberry and Playbook sales. The company held a demo mid-week. Yet, while shares performed well, the top options trade in RIMM seemed somewhat bearish as one investor bought the March – June 57.5 spread at $1.55, 16600X to open a new position. That is, they bought 16,600 June 57.5 puts and sold 16,600 March 57.5 puts, perhaps betting that shares will hold above $57.5 through March 2011, but then fall from that point forward.

Bearish flow also picked up in AMAG Pharmaceuticals (AMAG), Exco Resources (XCO), and American Movil (AMX).

Index Trading
Puts on the CBOE Volatility Index (.VIX) were actively traded Friday. The volatility index finished up .33 to 21.21 and added nearly 13 percent on the week ahead of key event risk, including elections, jobs data and a Fed rate meeting in coming days. Meanwhile, in options action, 146,000 calls and 160,000 puts traded in the VIX. The top trades were November 24 – January 22.5 put spreads at $1.30 per spread, 51,300X. In this trade, it looks like the investor sold 51,300 November 24 puts at $3.03 to buy 51,300 December 22.5 puts at $1.73. They might be rolling a bearish position out an additional month. VIX November options expire in 18 days and three days before the November expiration for equity options, which is now three weeks from today.

ETF Trading
Bearish spreads surfaced in the SPDR Retail Trust (XRT) Friday. Shares finished the day up 16 cents to $43.61 and options volume rose to 2.5X the average daily. 68,000 puts and 1,800 calls traded on the fund. The top trades were 10,000 December 41 – 37 put spreads at 63 cents. That is, the investor bought 10,000 of the December 41 puts at 90 cents and sold 10,000 December 27 cents. This spread is a bearish play, as it makes its best profits if shares fall to $37 or less by the December expiration. It might be a hedge or an outright bearish play on a monthly retail sales report due out next week. In addition, the spread was repeated more than once, as both contracts traded more than 20000X on the day.