High Anxiety 08-19-2011

Cusick's Corner
It has been a volatile August and the anxiety continued over weakening economic growth in the US and Europe this Expiration Friday. The CBOE Volatility Index (.VIX) edged up .38 and remains elevated at 43.05. Traders are trying to make their best estimates on whether or not we are going into a recession. Some of the data points that we are not but what's going on overseas matters too. Investors sought safety again -- Gold hit a new high. Don't keep your anxiety level elevated. Spend some time with the family this weekend, cool off in the pool so that you can get ready for the markets and some of the data that comes out next week: New Home Sales (Tues), Durable Orders (Wed), revised GDP and Michigan Sentiment (Fri). See you Monday.

Stock market averages gave up early gains and finished with substantial losses Friday. Hewlett Packard (HPQ) shares were down 20 percent and the biggest losers in the Dow Jones Industrial Average the day after the computer maker cut its outlook and said it might spin off its PC business. Beyond that, it was a relatively light earnings news day and was no economic data. The underlying tone of trading remains cautious on concerns about debt problems overseas and a slowing global economy. Much focus remains on Europe, where market averages faced a second day of selling pressure. After a 5.8 percent plunge Thursday, Germany's DAX lost another 2 percent France's CAC 40, Spain's IBEX, and UK's FTSE have also suffered steep losses during the past two days. In the US, the options expiration might have exacerbated volatility as well. At the end of the day, the Dow Jones Industrial Average lost 173 points and finished not far off session lows. The tech-heavy NASDAQ gave up 38.6.

Bullish
A massive spread trades in News Corp (NWSA) today. Shares finished the day down 63 cents to $15.56 and have now suffered a three-day 9.2 percent decline. One strategist seems to view the weakness as an opportunity for a bullish long-term play on the media company. In morning trading, 50,000 January 2013 20 calls on NWSA were bought at $1.40 and 50,000 January 2013 25 calls were sold at 50 cents. This hefty 20 - 25 call spread was bought at a 90-cent debit and appears to be a new position targeting a substantial move higher in NWSA shares from now through January 2013. The upside breakeven at expiration (excluding commissions) is at $20.90 and 34.3 percent above current levels. It was not a straight bullish play, as it was also tied to block of 900K shares (short) of stock at $15.85. Still, the spread represents an aggressive bet that shares will be moving higher, not lower, in the months ahead.

Bullish trading was also seen in Clearwire (CLWR), Silicon Graphics (SGI), and Flextronics (FLEX).

Bearish
Put spreads were purchased in Deutsche Bank (DB) Friday. Shares of the German banking giant lost $1.46 to $38.44 and set new 52-week lows. Shares are on a four-day 15 percent losing skid on a rough week for Europe's equity markets. One player seems to be bracing for additional losses in Deutsche Bank and bought an October 25 - 35 put spread on the bank for a $2 net debit, 4800X. That is, they bought 4,800 October 35 puts at $2.75 per contract and sold 4,800 October 25 puts at 75 cents each. The spread traded multiple times today and appears to be new bearish trading in DB. The max potential payout from the spread happens if shares fall to $25 through the October expiration, which represents a 35-percent plunge over the next 63 days.

Bearish flow also surfaced in Aeropostale (ARO), Hercules Offshore (HERO), and Valeant Pharmaceuticals (VRX).

Index Trading
Trading was orderly in the index market Friday, even as the S&P 500 Index (.SPX) swung rather wildly and finished the day down 17.12 points to 1,123.53. Approximately 990,000 puts and 861,000 calls traded across the SPX and other cash indexes. The CBOE Volatility Index (.VIX) edged up .38 and remains elevated at 43.05. Anxiety levels on Wall Street are high. In index options action, one of the top options trades in VIX today was a put spread, in which the investor bought 10,000 September 30 puts at $2.10 and sold 10,000 October 27.5 puts at $2.70. This diagonal spread might be a roll of short puts on the VIX from September to October and/or a bet that the index will possibly dip below 30 through the September expiration, but remain above 27.5 through the October expiration (note that the VIX contracts are based on forward values of the index, not the spot VIX).

ETF Action
In addition to the NWSA spread (see Bullish Flow), the top options trades today included large blocks of puts on the SPDR 500 Trust (SPY). The so-called "SPYders" finished the day down $1.87 to $112.64 and lost 4.6 percent on the week. Meanwhile, the top options trades in the ETF included a block of 50,000 September 108 puts at $3.02 and a block of 50,000 September 98 puts at $1.30. This Sep 108 - 98 put spread on the SPY traded at $1.72 and appears to be a bearish play on the ETF. It makes its best profits if shares fall to $98 through the September expiration. Stated differently, since SPY tracks the S&P 500, the max payoff happens if the market falls 13 percent over the next four weeks.