Operation Twist 09-19-2011
Cusick's Corner
I was not totally surprised that we saw some profit taking on the open and into the Midday due to the inability of any clear path on Greece. Global banks were the segment that was most beat up today. US banks did take some hits but weathered the pullback much better than their EU counterparts. I will be watching the results from the extended two-day meeting and the potential for "Operation Twist", regional banks, KRE, will come under pressure with the continued squeeze to the back end yield curve. Watch the Housing Starts in the pre-market, after the worse than expected data out last week, if starts are much worse than expected then the market could get more pressure. See you Midday.
Stock market averages fell on concerns about the European debt crisis, but are well off session lows heading into the closing bell Monday. Weakness across the Eurozone and a slumping euro set the table for morning weakness on Wall Street. EU officials over the weekend failed to yield any hard solutions to solve the mounting debt problems across some areas of the continent. Some investors worry that a Greek debt default could trigger widespread problems for global banks and roil financial markets. France's CAC 40 lost 3 percent and Germany's DAX gave up 2.8 percent Monday. In the US, the domestic economic news included the latest homebuilder sentiment index from NAHB, which fell to 14 in September, from 15 the month before and 1 point worse than expected. Meanwhile, President Obama outlined details of a $3.6 trillion deficit reduction plan Monday morning, but the news seemed to have relatively little market impact. Instead, the focus is on Europe and the jitters sent stock market averages sharply lower into midday. However, news that Greek finance ministers might have secured a debt deal triggered a rebound in the euro and stock market averages late in the day.
Bullish
Tyco (TYC) saw a day of heavy trading after the company announced plans to break up into three different business units. Some analysts now believe that some or all of the businesses might be acquisition targets. Shares gained $1.05 to close $44.92 on the news and options volume is running 4.5X the daily average. 15,000 calls and 9,350 puts traded in the name so far. The top trades of the day were initiated early in the session, as one investor apparently bought 500,000 shares at $45.45, sold 5,000 October 49 calls on TYC at 70 cents and bought 5,000 October 40 puts at 40 cents. That is, an Oct 40 - 49 "collar" was initiated at $45.15 per shares. This strategy has a similar risk graph as a long call spread. However, the strategist is taking a position in shares rather than calls to participate in the move higher. The Oct 40 put - 49 call options combo is really a hedge or a "collar" around shares. The sale of the calls pays for the puts and also limits the upside if shares rally beyond the $49 strike. The $40 puts hedge the downside risk.
Bullish trading was also seen in Teck Resources (TCK), Southwest Energy (SWN), and Collective Brands (PSS).
Bearish
Options volume jumped in Rent-A-Car (RCII). Shares of the Plano, TX rental and leasing company lost 34 cents and closed $28.73. 12,000 calls and no puts traded on the stock today. By way of comparison, typical volume in RCII options is about 65 contracts. The focus is on December 35 calls and includes an 8,845-contract block at 35 cents when the market was 35 to 40 cents. 11,800 now traded against 290 contracts of open interest. Looks like call writers opening positions. It's not necessarily bearish trading, but seems to reflect expectations that shares will hold below $35 through the December expiration, which represents a 21.8 percent move higher over the next 88 days. A shareholder might have initiated the trade as part of a covered call or buy-write strategy.
Bearish trading was also seen in Intel (INTC), Cypress Semiconductor (CY), and International Game Technology (IGT).
Index Trading
CBOE Volatility Index (.VIX) options remain actively traded ahead of the expiration and amid relatively high levels of market volatility today. September VIX options expire Wednesday and the last days to trade the contracts are today and tomorrow. Consequently, trading is likely to remain brisk Tuesday, as players adjust positions before the contracts expire. Today, VIX rallied to a morning high of 35.33, before grinding lower into midday and then falling in the final hour. VIX gained $1.75 to close $32.59 and 7.8 percent off its best levels. 285,000 calls and 135,000 puts traded in VIX Monday. Look for heavy trading in the expiring Sep 27.5 puts and 32.5 calls tomorrow, as both contracts are now out-of-the-money and currently have the largest open interest positions in VIX options. If the index settles between those two strikes when the settlement value is computed Wednesday morning, all of those contracts expire worthless.
ETF Action
Powershares DB Agricultural ETF (DBA) sees interesting trading activity today. These shares, which track the price action of various Ag commodities like corn, wheat, and soybeans, lost 25 cents to close $31.77. Options volume is running 3X the daily average for the ETF. Most of the focus is on January 35 calls and included morning buyers paying 85 and 86 cents per contract. 14,200 now traded. DBA has been hammered in September and is down 6.8 percent month-to-date. Today's buyers might be taking positions in Jan 35 calls, which are 10 percent out-of-the-money and expiring in 123 days, on the view that agricultural prices will rally and recover their recent losses through mid-January 2012.
