Market Reacts to Unemployment 07-08-2011

Cusick's Corner
The macro picture in the US is not as rosy as the market was picturing. But by no means does this mean that we are in a major trend shift, in fact this is a market that is still in an uptrend. The question is what the Fed will do now that QE is off the table and Washington is still maneuvering on the Debt Ceiling issue. At this stage I am taking on some long deltas in the S&Ps into the After Hours and potentially into the weekend and I also took an opportunity to get a bear spread on the bonds, taking advantage of this big move. I am spreading into the weekend to fix my risk while being able to trade my sentiments and convictions. Want to see the market hold the 1330 in the S&Ps and will watch the bonds, 10 YR, see if it holds 3%. Also note that the VIX did not make a big move and has actually has pulled back; the fear is not reflected in the options market compared to the pullback we have seen after the Jobs data.

Stocks are broadly lower on disappointing jobs data Friday. The day after an upbeat employment report from ADP helped spark a rally on Wall Street, hopes for quick turnaround in the employment outlook were dashed when the Labor Department said the US economy added only 18,000 new jobs last month. Economists were expecting to see an increase of 80,000. May numbers were also revised down and the rate of unemployed increased to 9.2 percent from 9.1 percent. Economists were expecting the unemployment rate to hold steady at 9.1 percent. The poor jobs data overshadowed the other news of the day and the Dow Jones Industrial Average is down 106 points through mid-session. The tech-heavy NASDAQ lost 30.4. CBOE Volatility Index (.VIX) edged up .57 to 16.52. Options volume is a bit more defensive today, with 3.6 million calls and 4.1 million puts traded through 12:00pm ET.

Bullish Flow
Ford Motor (F) shares are down and call options on the automaker are heavily traded today. Ford lost 37 cents to $13.75 after poor jobs data fueled new concerns about the pace of economic activity and future consumer spending. Meanwhile, in options action, a noteworthy trade in Ford is a block of 24,000 August 15 call options. This trade printed on the International Securities Exchange at 19 cents per contract. Data from the ISE indicate an opening buyer. More than 40,000 Aug 15 calls on Ford have now traded. The contract is 9 percent out-of-the-money and expires in six weeks. Total volume in Ford is 82,000 calls and 21,000 puts, as some investors seem to view today's weakness as an opportunity for bullish trades on the automaker.

Sanofi (SNY) shares are trading up after Bernstein analysts upgraded the pharmaceutical maker to Outperform from MarketPerform. Shares added 8 cents to $39.72. Options volume includes 5,080 calls and 300 puts, which is 3.5X the average daily. July 40s, which are now 28 cents out-of-the-money, are the most actives. 4,270 traded and, with 83 percent hitting at the ask, it appears that call buyers are taking positions and looking for the stock to move above $40 through next week's expiration.

Bearish Flow
The most actively traded options contracts today are puts on the SPDR 500 Trust (SPY). The so-called "SPYders" are trading down $1.45 to $133.91 and the Weekly 133 puts, which expire after today, are seeing the most volume. 129,470 contracts traded against 86,686 in open interest. Some investors are likely taking positions on concerns about additional weakness in the equity market this afternoon. However, the low for the day is $133.39 and if shares of the exchange-traded fund hold above $133, the contract expires worthless. The July 133 puts Weekly 134 puts are today's second and third most actively traded contracts.

TRW Automotive (TRW) shares are trading down $4.72 to $54.73 and options volume is running 8.5X the average daily, being driven by put spread trades. In morning action, one investor apparently bought 750 August 50 puts at $1 and sold 750 August 45 puts at 33 cents, paying 67 cents for the spread. It has traded multiple times today and volume in both contracts has surpassed 2,000. It appears to be opening activity. This spread offers a max payoff if shares fall to $45 through the August expiration, a market decline of 17.8 percent over the next 42 days.

Unusual Volume
MGM options volume is running 2X the (22-day) average, with 100,000 contracts traded and put activity accounting for 73 percent of the volume.

Baxter (BAX) options volume is 11X the average daily, with 57,000 contracts traded and call volume representing 75 percent of the activity.

Procter & Gamble (PG) options volume is running 2.5X the average daily, with 54,000 contracts traded and call volume representing 91 percent of the total volume.

Increasing options activity is also being seen in Seagate Tech (STX), Fifth Third (FITB), and Yum Brands (YUM).

Implied Volatility Mover
CBOE Volatility Index (.VIX) is moving up today, but doesn't seem to reflect any real panic or fear on Wall Street. VIX, which tracks the expected volatility priced into S&P 500 Index options and is sometimes called the market's "fear gauge", is up .64 to 16.59. It is a far cry from the levels seen in mid-March, when worries about the Japanese quake and European Debt Crisis sent the index rallying to 31.28. In fact, VIX dipped to 15.3 yesterday and the lower end of its recent range. So, while stocks are under pressure, the decline thus far seems orderly and not indicative of any type of extreme negativity or panic among investors.