Mixed Close 08-30-2011

Cusick's Corner
Solid day in the markets but I did not like the action in the last hour, there was a doji print on the 60-minute chart in the Sept S&P futures, signaling some potential indecision. I am going to watch the overnight action to see if there is confirmation, in other words to see if the S&Ps are below the 1200 level. This is a short-term signal and it does not change my swing term bias of being bullish, just a flag that I want to keep an eye on. Volatility in the front month, September VIX futures at 32.5, did pop into the close and is much higher than the later months -- December VIX futures are trading 29.17, telling me that we are off the highs but that market in the near term is still on alert. This is also why I am favoring strategies that take advantage of high volatility and sentiment. I have a presentation that covers some of these strategies, Strike Price Selection, and if you are interested in a copy please e-mail me at education@optionsxpress.com. Watch the Crude Inventories tomorrow, until then -- see you Midday.

Stock market averages finished a seesaw session with modest gains Tuesday. Disappointing economic news set the table for morning weakness after Case Shiller reported that its index of home prices across 20 cities fell 4.5 percent in June, which was a bit better than the 4.7 percent decline that was expected. A bit later, the Conference Board said its index of consumer confidence fell to only 44.5 in August, from 59.2 the month before and well below economist estimates of 52.0. Stock market averages slipped on the data because it cast a spotlight back on the weakening US economy. But trading turned mixed into midday and heading into the minutes from an August 9 FOMC meeting, which came into focus at 2:00 pm ET. The text showed some Fed officials are pushing for additional monetary stimulus, as unemployment remains high and inflation is low. Stock market averages saw a modest uptick after the FOMC minutes were released and, at the closing bell, the Dow Jones Industrial Average had added 21 points. The tech-heavy NASDAQ gained 14.

Bullish
JDS Uniphase (JDSU) shares jumped 9.5 percent to $13.44 and have tallied a 20 percent rally in just two days. Meanwhile, 51,000 calls and 13,000 puts traded on the stock today. The top trades were part of a spread on the communication equipment maker, after one strategist sold 10,000 October 12 calls at $1.78 and bought 15,000 October 14 calls at 83 cents per contract. This 2X3 call ratio backspread looks like a position adjustment or a roll. That is, the strategist was selling-to-close a position in October 12 calls, which are now $1.44 in-the-money, to open a new larger bullish position in the Oct 14 calls, which are 56 cents out-of-the-money. The strategist might have correctly anticipated the recent surge in shares and is banking a profit, but also keeping bullish exposure by opening a new position in the Oct 14s. In other words, they expect the rally to continue.

Bullish trading was also seen in Dryships (DRYS), CoreLogic (CLGX), and Hertz (HTZ).

Bearish
Monsanto (MON) options have been active for the past two days on reports of a new "super-bug" in corn crops that is showing resistance to existing pesticides. Shares hit a low of $67.36 on the headlines Monday morning and then finished the day down 90 cents to $69.78 yesterday. MON gave up another 31 cents to $69.47 today and options volume hit 3X the average daily. 34,000 calls and 13,000 puts traded in the name. The action included heavy selling of January 60 and 70 call options. The 60s traded 12,000 contracts and 69 percent of the flow was on the bid. Another 11,100 January 70 calls changed hands and 78 percent traded on the bid. Open interest is sufficient to cover in both contracts and the call selling might be liquidating trades. That is, the negative headlines are motivating some investors to close bullish positions in Monsanto. It's not necessarily bearish flow, but reflects diminishing expectations for a rally in shares through the January 2012 expiration.

Bearish flow also surfaced in Assured Guaranty (AGO), Alexion Pharmaceuticals (ALXN), and SilverMetals Corp (SVM).

Index Trading
It was another light volume day in the index market, with about 493,000 calls and 699,000 puts traded across the S&P 500 Index (.SPX), CBOE Volatility Index (.VIX) and other index products, which is only about 57 percent the recent average daily volume, according to Trade Alert data. VIX seesawed back and forth and finished up .61 to 32.89. Meanwhile, an interesting trade surfaced in the NASDAQ 100 Index (.NDX). The index added 13.70 to 2,237.69 and an October 2300 - 2325 - 2400 - 2425 call condor spread was bought on NDX at $5.50, 2300X. That is, the strategist sold 2300 Oct 2325 and Oct 2400 calls on the index for the body of the condor and bought 2300 of the October 2300 and 2425 calls for the wings. This spread will pay-off nicely if the index settles between 2325 (+3.9 percent) and 2400 (+7.3 percent) through the October expiration (52 days).

ETF Action
While one strategist was initiating a bullish spread on the NASDAQ 100 Index (.NDX) another was playing a put spread on the PowerShares QQQ (QQQ). The difference between these two investments is that, while NDX is an index that tracks the 100 largest non-financial NASDAQ-listed stocks, the QQQ is an exchange-traded fund that holds the same NASDAQ 100 companies. QQQ shares can be bought and sold and are designed to equal roughly 1/40th of the NASDAQ 100 Index. The ETF added 36 cents to $54.97 on the session and the top options trade in the fund was a Nov 54 - 49 put spread, bought at $1.25, 45000X. That is, the investor bought 45,000 November 54 puts at $2.36 and sold 45,000 November 49 puts at $1.11. The spread is a bearish bet with a max payoff if shares fall to $49 or less through the November expiration. An institutional investor might have initiated the trade to hedge a portfolio of NASDAQ-listed stocks.