Volatility Crush 10-12-2011

Cusick's Corner
Impressive -- this has been an impressive move in spite of the low volume. There is little in the way of resistance and what has been equally impressive is the volatility crush, VIX down over 30% in the last 6 days, which at the very minimum is not contradicting the move in equities. This is a market that now could get caught in a choppy range while the large GEO-economic risks work themselves out. See you After Hours.

Gains across Europe helped set the table for a morning rally on Wall Street and stock market averages are holding the gains through midday. Equity markets rallied across the Eurozone and the euro added another 1.3 percent on the buck on hopes for a bank plan. EU Commission President Jose-Manual Barroso presented a new proposal to help Greece lower its debt and to strengthen European banks Wednesday. The euro is now trading north of 1.38 on the buck, from 1.3175 last Tuesday. In equity market action, Germany's DAX and France's CAC 40 Index both gained more than 2 percent. In the US, focus will shift to the release of FOMC minutes this afternoon. Beyond that, the economic calendar is light until weekly jobless claims and trade balance figures Thursday morning. Until then, Europe seems to be the primary drive of market action and, as a result, the Dow Jones Industrial Average is up 160 points on the day. The tech-heavy NASDAQ gained 38.5. CBOE Volatility Index (.VIX) is down another 2.75 to 30.11. Overall options volume is running at its best levels of the week, with 5.4 million calls and 5.7 million puts traded across the exchanges through 12:30pm ET.

Bullish Flow
Liz Claiborne (LIZ) rallied $1.87 to $6.97 and options on the stock are heavily traded after the company announced plans to sell Liz Claiborne and Monet brands to JC Penney and the Kensie brand to Bluestar Alliance. Shares are rallying around the news and options volume through midday includes 23,000 calls and 4,900 puts. January 8 calls, which are now 14.8 percent out-of-the-money, are the most actives. 7,570 traded, including several blocks on the 70 and 75-cent bid. Open interest in the Jan 8 call on LIZ is only 222 contracts and the apparent call writing looks like opening activity. Some shareholders might be taking advantage of the stock strength and rich premiums (high implied volatility) to sell these out-of-the-money calls against stock. Implied volatility in LIZ is up 2 percent and elevated at 82 percent today.

Options on US Steel (X) are seeing brisk trading today. Shares of the steelmaker gained $1.43 to $24.68 on the day. Meanwhile, 46,000 calls and 12,000 puts traded on the stock. October 25 calls, which are now 32 cents out-of-the-money and expiring in 9 days, are the most actives. 9,080 traded. October 26 calls are the second most actives. 8,870 changed hands. Speculators are taking positions in upside calls on the stock and apparently looking for the stock to extend its recent rally through the end of next week. Shares are already up more than 30 percent from a 52-week low of $18.85 set intraday last Tuesday.

Bearish Flow
News Corp (NWS) is up 47 cents to $17.36 and on a seven-day 14.1 percent run higher despite ongoing unrest among shareholders related to a hacking scandal that roiled the company this summer. An advisory firm was out with a letter yesterday suggesting that shareholders should vote to remove four Board members. Yet, shares have been trading higher despite the uncertainty. In options trading today, October 16 puts on NWS are seeing noteworthy flow. 20,500 traded, including a buyer of 15,000 contracts at 15 cents. The market for Oct 16 puts on New Corp is only 10 to 15 cents because the contract is 7.8 percent out-of-the-money and has only 9 days of life remaining. A shareholder might have initiated the trade as a short-term hedge.

The largest options trade so far today is in the S&P 500 Trust (SPY). The so-called "SPYders" are up $2 to $121.70 and a 60,000 contract block of SPY October 115 puts traded on the ETF at $1.26. The trade coincided with a 40,000-contract block of October 118 puts at 64 cents. The two blocks were part of a 2X3 put ratio spread. The investor bought the 118s and sold the 115s, according to a source at the options exchange. It's a bearish play, as the 2x3 offers a max payout if SPY falls to $115 through the end of next week, which represents a market decline of about 5 percent.

Unusual Volume
Walmart (WMT) options volume is running 2.5X the (22-day) average, with 69,000 contracts traded and call activity accounting for 74 percent of the volume.

Omnivision Technology (OVTI) options volume is 3X the average daily, with 31,000 contracts traded and put volume representing 75 percent of the activity.

MGIC Investments (MTG) options volume is running 9X the average daily, with 31,000 contracts traded and call volume representing 100 percent of the total volume.

Increasing options activity is also being seen in Western Digital (WDC), Baxter (BAX), and Cypress Semiconductor (CY).

Implied Volatility Mover
Alcoa (AA) is down 2.3 percent to $10.06 and the biggest percentage decliner among three Dow losers today. AA shares fell after hours yesterday when the aluminum maker posted earnings that fell short of Street estimates. Trading in Alcoa's options is brisk today. 67,000 calls and 43,000 puts on the stock so far. October 10 calls, which are now at-the-money and expiring in 9 days, are the most actives. 20780 traded. Meanwhile, implied volatility in options on the stock is down about 18 percent to 54 and falling sharply now that the earnings "event risk" has passed. This is typical after earnings and is known as a volatility crush.