Red Light, Green Light 08-10-2011

Cusick's Corner
Taking 600+ points out of a market does things to any man or woman. This has to be hard to watch if you are long the market and continue to see the environment deteriorate around you, getting so bad that even the strongest of the bulls are capitulating (a more appealing way of saying puking). The trade is small, day to couple day swing trades and if you are long look to potentially raise cash, flip outright stock holdings into LEAPS, long term options that expire 1-3 years out. Strategically it keeps the long exposure you want while mitigating the cash you have to put up when owning stocks outright. If you are bargain hunting, not suggested at this stage en masse, selling puts either as a credit spread or cash secured outright would be the action to potentially take. The most frustrating and baffling trade is the treasuries, they are just not coming down and while in the future that could be a sector of potentially great bearish positioning, at this stage it is better left alone and watched until we get a conclusion to this uncertainty, watch France by the way. See you After Hours.

Global financial markets remain volatile and stocks are broadly lower through midday. After a 430-point rally in the Dow Jones Industrial Average Tuesday, the table was set for morning weakness on Wall Street after European stock benchmarks suffered steep losses. Germany's DAX and France's CAC 40 both tumbled more than 5 percent on concerns about French bank exposure to troubled European debt. A spokesperson for Societe Generale was out with comments today and denied the speculation, but shares tumbled across the Eurozone nonetheless. The volatility seems to have spilled over onto US shores, as the Dow Jones Industrial Average is down 377 points through midday. The tech-heavy NASDAQ lost 68. Yet, crude oil is up $1.65 to $80.95 per barrel on bullish weekly inventory data and gold rallied to another record, now up $41.5 to $1782.90 an ounce. The volatility across global financial market is stirring up a lot of options action. The CBOE Volatility Index (.VIX) jumped 7.02 to 42.08 and about 5.8 million calls and 6.5 million puts traded across the exchanges so far.

Bullish Flow
Cree Inc. is shining in a bearish market after the company reported better than expected fourth quarter earnings and revenues after the closing bell yesterday. CREE rallied $4.59 to $34.08 and trading in options on the maker of Light Emitting Diodes (LEDs) is very heavy. 58,000 calls and 8,190 puts traded in the name so far. The top trades are part of a spread, in which the investor apparently bought 10,000 Sep 40 calls at $1.04 and sold 20,000 Sep 47 calls at 18 cents. This 1X2 ratio spread, for a 68-cent net debit, appears to be a bullish play targeting a move in CREE shares beyond $40.68 through the September expiration, which is in 37 days.

Marvel Technology (MRVL) call options are heavily traded today. Shares are down 7 cents to $11.91 and have been attempting to rebound off a 52-week low of $11.23 set yesterday. Options volume in MRVL so far is 90,000 calls and 16,000 puts. Typical volume through midday (puts and calls) is about 15,000 contracts. August 16 calls are seeing heavy action. 21,765 traded. November 16, August 17, August 18 and November 17 calls are seeing brisk trading as well. Some investors might be closing out positions in these now deep out-of-the-money calls. Others might be taking bullish positions on hopes for a rally into earnings. MRVL reports next Thursday, which is the day before the August expiration Friday.

Bearish Flow
22,000 puts and 4,665 calls traded in Cemex (CX) today. Shares of the Mexican cement company are falling to new 52-week lows and were recently down 32 cents to $5.04. Shares have now tumbled more than 40 percent since June. The top options trade in CX today is an 8,522-contract block of January $3 puts at 31 cents. It coincided with a 4,261-contract block of January $5 puts at 98 cents. The two trades have all the signs of a Jan 5 - 3 (1X2) put ratio spread, which would make its best profits if shares fall to $3 through the January expiration. It might, however, be a roll down in strike prices, as open interest in CX Jan 5 puts is 28,508 and the largest position in the name. In other words, the investor is closing out Jan 5 puts to open a new position half the size in Jan 3 puts.

iShares Taiwan Fund (EWT) saw a vicious five-day 15.3 percent plunge before gaining 5.7 percent Tuesday. The volatility continues today, as shares are taking a 40-cent hit and now trade at $13.13. Options order flow in EWT is noteworthy today, with 33,000 puts and 150 calls traded in the ETF so far, which is 6X the average daily. December 13 puts saw morning buyers of 15,000 contracts at $1.08 per contract. December 12 puts are the most actives. 17,500 traded, as some investors appear to be buying downside puts in EWT on concerns about additional losses in Taiwan's equity markets from now through December.

Unusual Volume
Sandisk (SNDK) options volume is running 2.5X the (22-day) average, with 74,000 contracts traded and put activity accounting for 80 percent of the volume.

CREE options volume is 2.5X the average daily, with 67,000 contracts traded and call volume representing 88 percent of the activity.

Disney (DIS) options volume is running 2.5X the average daily, with 43,000 contracts traded and call volume representing 51 percent of the total volume.

Increasing options activity is also being seen in HCA, HSBC (HBC), and Lennar (LEN).

Implied Volatility Mover
Keybank (KEY) is down and implied volatility is up amid increasing levels of put activity Wednesday. Shares of the Denver-based regional bank are off 45 cents to $6.47. 9,800 puts and 1,300 calls traded in KEY. Typical volume through midday is about 1,500 contracts. September 8, December 6, December 7, and September 6 puts are the most actives. Some of the action appears to be closing trades. Still, implied volatility in KEY options jumped 32 percent to 72, as there appears to be some anxiety building about the short-term outlook for shares of the bank.