On the Road Again 11-15-2011

Cusick's Corner
Impressive -- the bid picked up in the afternoon as the market digested the domestic data and the rate spikes in the EU bond markets. The market is now at a level to challenge to the upside and if we can see 1265 on the S&Ps, we could see the challenge to 1280 pretty quickly. I am off to the Traders Expo in Las Vegas for the rest of the week so I will talk to you tomorrow from Sin City. See you Midday.

Stock market averages finished with modest gains with help from economic news Tuesday. Data released early showed Retail Sales up .5 percent in October and .1 percent better-than-expected. Separately, the Labor Department reported that the Producer Price Index [PPI] fell .3 percent in October and .1 percent more than expected. A third piece of data showed the NY Empire Index of manufacturing activity up to .61 in November, and a bit better than the .8 percent decline that was expected. However, trading was sluggish early following another round of losses across European equity markets. France's CAC 40 Index gave up 1.9 percent to pace the decline and the euro lost another .8 percent on the dollar after rising Italian bond yields rekindled worries that the debt crisis is still spreading. Yet, the domestic economic numbers were mostly positive and, in contrast the recent pattern, seemed to trump worries about problems overseas. By midday, the Dow Jones Industrial Average had battled back to trim its loss to just 1 point. The Dow then strengthened in afternoon action and finished the day up 17 points. The tech-heavy NASDAQ saw relative strength and added 29 points.

Bullish
Hewlett Packard (HPQ) gained 3.4 percent to $28.24 and was the best gainer in the Dow Jones Industrial Average today. Options volume on the computer-maker was approximately 50,000 calls and 17,000 puts, which is twice the daily average for H-P. The top trades of the day were part of a spread, in which the strategist sold 12,500 January 27 calls at $2.81 and bought 16,500 January 29 calls for $1.78. The activity looks like rolling. On October 10, a 12,500-contract block of Jan 27 calls traded for $2.30. H-P was trading for $26 per share at that time. It is has since rallied 8.6 percent and the strategist is selling-to-close the position in the 27 calls, which are in-the-money, and now buying-to-open a new larger position in out-of-the-money $29 calls. They might expect the winning run to continue and the position adjustment comes ahead of Hewlett Packard's earnings, which are due out on Nov 21.

Bullish trading was also seen in Avon Products (AVP), Heinz (HNZ), and Brinker (EAT).

Bearish
Transocean Offshore (RIG) shares came under pressure in afternoon trading on news of a leak at a rig run by the oil driller and Chevron Texaco (CVX). Shares of Chevron lost 2.7 percent and were the biggest losers in the Dow today. Meanwhile, RIG gave up $1.85 to $47.86 and options volume was 57,000 puts and 42,000 calls, which is 5X the daily average volume for Transocean. November 45 puts, which are 6 percent out-of-the-money and expire at the end of the week, were the most actives. 11,460 traded. Volume in November 47.5 puts on the stock approached 11,000. Some investors might have been taking positions in short-term downside puts on concerns about the headline on the stock today. That is, they're buying puts to hedge stock until more details about the oil leak come to light.

Bearish trading was also seen in Frontier Communications (FTR), Gamestop (GME), and FCN Consulting (FTI).

Index Trading
CBOE Volatility Index (.VIX) edged up .09 to 31.22 and it was a busy day in the VIX pit today due to the expiration. The volatility index is unique because options on the product expire on Wednesdays and the last day to trade is therefore Tuesday. 259,000 puts and 152,000 calls traded on the index Tuesday. The top trade was a spread, in which the investor apparently bought 9,500 November 17 calls at $15.39 and sold 9,500 December 17 calls at $14.29. The strategist is likely rolling a position in in-the-money calls to avoid assignment at expiration. The contract will be assigned if the settlement value of the VIX, which will be computed tomorrow morning, is greater than 17. If a short option is ITM and held at expiration, assignment will result in the transfer of cash to the option holder, which is equal to the difference between the strike price of the option and the settlement value of the index (X the 100 multiplier).

ETF Action
An interesting trade went off in the iShares Hong Kong Fund (EWH) Tuesday. Shares gained 15 cents to $16.11 and one strategist sold a March 15 - 17 strangle on the ETF at $1.40, 30000X. That is, they sold 30,000 March 15 puts at 85 cents and sold 30,000 March 17 calls at 55 cents. Volume exceeds existing open interest and so this appears to be a new position. If so, it's probably a bet that shares will hold around current levels, or between $15 and $17, through March 2012. In other words, it's a big bet that trading in Hong Kong will be orderly and without much volatility over the next four months.

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