Volatile Bull 08-31-2011

Cusick's Corner
The line was drawn -- mid 1220s and we had late day selling off these highs with little interest from big money and worse-than-expected data still weighing on the market. One sector that was lagging all day was Tech, QQQ +.09, and if Tech continues to show some weakness, could be a flag going into the long weekend which the Street may have already begun. Claims data is due out pre-market and if the trend in Claims continues up and ISM pulls back, well the "R" word might be uttered all day long. Got to run, the wife read the Midday -- guess who is driving the carpool? (Me and my big mouth!)

Stock market averages finished with modest gains Wednesday, but were down for the month of August. Trading on Wall Street was steady early today after stock benchmarks were mostly higher across Asia and were posting solid gains in Europe as well. France's CAC 40 Index helped pace the advance after rallying more than 3 percent. Germany's DAX gained 2.5 percent and UK's FTSE added 2.4 percent. The recent equity market rallies across the Eurozone seem to reflect diminishing concerns about the European debt problems. On the economic front, ADP reported that the US economy added 91,000 private sector jobs in August. The headline number wasn't far off expectations and the data comes ahead of the Labor Department's monthly jobs data Friday. Other reports today showed Chicago PMI, a gauge of regional manufacturing activity, falling to 56.5 in August, from 58.8 the month before and not as bad as the 53.0 that was expected. Factory orders rose 2.4 percent in July and .6 percent more than expected. Stocks were stead on the economic news and the Dow Jones Industrial Average was solidly higher at midday. From there, market action was choppy. The Dow gave up its gains and was in the red in afternoon action, but then rallied again in the final hour. At the end of the day, the industrial average was up 54 points on the session, but down 529 points for the month of August.

Bullish
Suncor Energy (SU) shares added 16 cents to $31.90 today and are up 10 percent since a 52-week low of $29 per share was touched on August 22. Options volume in the Calgary-based oil and gas company was noteworthy, as 34,000 calls and 3,000 puts traded in the name today. Much of the action was focused on January 2013 calls at the 45 line. 20,449 traded, including a buyer of 19,000 at $2.15 per contract. The same call option saw opening buying on Thursday and Friday of last week. Open interest is now 23,314 and the second largest position in the name. One or more investors might be accumulating longer-term positions on Suncor on the view the recent drop in the share price represents an opportunity for bullish trades on the stock. However, rather than buying shares outright, they are buying the calls and locking in the right to buy the stock at $45 through January 2013.

Bullish trading was also seen in JDS Uniphase (JDSU), Sprint Nextel (S), and AMR.

Bearish
Western Digital (WDC) shares lost 14 cents to $29.49 today, but are up 11.7 percent since August 19. In options action, 13,000 puts and 550 calls traded on the storage device maker today. The top trade of the day was a 5,483-contract block of September 28 puts at 63 cents on the International Securities Exchange. It was an opening buyer, according to data from the ISE. 7,132 traded on the day. September 25 puts were busy as well, with another 5,638 traded. Some investors might be taking positions in downside September puts on Western Digital on concerns the stock might give back recent gains over the next two and a half weeks. Shares came under pressure on August 18 when S&P equity analysts cut their rating on the stock to Sell amid concerns about slowing demand for disk drives.

Bearish flow also surfaced in AT&T (T), Smithfield Foods (SFD), and News Corp (NWSA).

Index Trading
The top index options trades Wednesday were in the S&P 500 Index (.SPX). The index added 5.97 points to 1,218.89 today, but lost 5.9 percent on the month. In options action, the biggest trades in the index were part of a ratio spread. In this trade, the investor apparently sold 11,800 December 1,100 puts at $32.80 and bought 17,700 December 900 puts at $10.00. $35.60 was collected on this 2X3 put ratio backspread and that credit will be kept if the position is held through the expiration and the SPX holds above 1,100 (-9.75%). Gains are also possible if SPX makes a very volatile move lower, because the strategist is long three 900 puts and short two 1,100 puts. The worse-case scenario happens if the position is held to the expiration and SPX settles at 900 (-26.6%). At that point, the 900 puts, which were bought, expire worthless and the 1,100 puts, which were sold, are worth $200 apiece! However, today's spread is possibly closing a 2X3 or a position adjustment, as open interest is sufficient to cover in both contracts.

ETF Action
An interesting put butterfly spread trades in the iShares Small Cap Fund (IWM) today. Shares lost 15 cents to $72.65 on a day of relative weakness in the shares of smaller companies. In options action, one strategist was accumulating a position in the IWM December 55 - 65 - 72 put spread. 52 cents was paid, 28000X (56,000 December 65 puts were sold for the body of the fly). This position looks opening, as volume was in excess of open interest. If so, it's a bearish trade on the small caps, as it makes its best profits if shares fall to $65 through the December expiration, which represents a 10.5 percent drop in the Russell 2000 Small Cap Index over the next 107 days. Also notice that the strikes are not equidistant apart. There's a ten point difference between the 55 and 65 puts and seven points between the 65s and 72s. This is an unbalanced or modified fly. To see how the spread works, Analyze the Trade and compare the potential profits and losses to the Dec 55 - 65 - 75 IWM put fly.