Volatility Weakens 09-07-2011

Cusick's Corner
The market has now shifted into a neutral stage, except of course in Gold, GCZ11 -$44, which is in a free fall. I am not trying to catch a falling knife so I also am not jumping on the band wagon of selling Gold at this time; Gold is a trade that I am keeping an eye on to get a better read. I am managing some of my spreads that I have had on over the last week or so. One trend that has been occurring during this recent run up -- volatility is coming out, especially in some of the Financials that I had credit spreads on, triggering some profit taking into this neutral phase. The action for the rest of the day will be choppy but tight ranged until the President unveils his jobs speech. See you After Hours.

Stocks are broadly higher on a relatively light news day. After a jump in market volatility to start the week, the underlying tone of trading improved Wednesday morning after Europe's equity markets rallied on diminishing concerns about the debt crisis after a court in Germany rejected a lawsuit designed to block the country from offering aid to Greece and other troubled nations. Germany's DAX helped pace the advance with a 4.1 percent surge. Gains in equity markets overseas helped to spark a rally on Wall Street and, with no earnings or economic releases of significance to guide trading, the Dow Jones Industrial Average is up 200 points at mid-session. The tech-heavy NASDQ gained 56.5. CBOE Volatility Index (.VIX) eased 2.89 points to 34.11. Overall options volume is light today, but reflects the improved sentiment. 4.3 million calls and 3.7 million puts traded across the exchanges through 12:30pm ET.

Bullish Flow
Yahoo (YHOO) shares are up after the Internet giant ousted Chief Executive Carol Bartz. Investors seemed to view the management shake-up as a positive for YHOO, as the stock is up 49 cents to $13.40. Options on Yahoo are very heavily traded as well, with 216,000 calls and 64,000 puts traded in the name through midday. October 20 calls, which are almost 50 percent out-of-the-money and expire in 44 days, are the most actives. 55,000 traded, including a seller of 26,000 contracts at 7 cents per contract in morning trading. Some investors might view today's strength as an opportunity to exit positions, as open interest in the YHOO Oct 20 call is 178,837 and the largest position in stock. YHOO September 14, October 14, October 16 and January 16 calls are seeing heavy trading as well.

An impressive block of calls trades on chipmaker Intel (INTC). Shares are up 2.3 percent to $20 and one of thirty Dow stocks moving higher midday Wednesday. In options action, morning trades in Intel include a buyer of 50,000 December 24 calls at 9 cents per contract. Open interest in the contract is 16,251 and so this purchase looks like a new position. It seems to be a bold play, as the Dec 25 call on Intel is 25 percent out-of-the-money and expires in 100 days. The delta on this call option is .07, which suggests a 93 percent probability it will expire worthless.

Bearish Flow
Starbuck's (SBUX) shares are up $1.61 to $39.36 and options volume on the coffee chain today includes 17,000 puts and 6,250 calls. The top trades are part of a ratio spread, in which strategist apparently sold 3,600 October 34 puts on SBUX at 67 cents and bought 1,800 January 38 puts at $3.05. In other words, a Jan 38 - Oct 34 (1X2) put ratio spread was initiated for a $1.71 net debit, 1800X. The spread might roll a bearish position from October 34 puts, where open interest is sufficient to cover, to a position twice the size in the January 38 puts. Or, it's possibly a bet that shares will fall through the rest of 2010, but not below $34 through the October expiration, which is in 44 days.

Kirby Corp (KEX), a Houston, TX shipping company, is rallying today and calls are active in the name. Shares are up $3.45 to $55 and the focus is on the September and October at-the-money call options. Oct 55s are the most actives. 3,135 traded. In addition, with 70 percent of the volume traded on the bid and existing open interest of 539 in the contract, the action looks like opening call writing and seems to reflect expectations for limited upside in the stock. September 55 calls, which expire at the end of next week, have traded 1,077 contracts (93 percent Bid) against 118 in open interest.

Unusual Volume
Yahoo (YHOO) options volume is running 3.5X the (22-day) average, with 279,000 contracts traded and call activity accounting for 77 percent of the volume.

Walter Energy (WLT) options volume is 6X the average daily, with 74,000 contracts traded and call volume representing 77 percent of the activity.

CREE options volume is running 2X the average daily, with 71,000 contracts traded and put volume representing 95 percent of the total volume.

Increasing options activity is also being seen in Arch Coal (ACI), NRG, and Verisign (VRSN).

Implied Volatility Mover
Walter Energy (WLT) is rallying and options on the stock are heavily traded on reports of a possible bid for the company (Reuters). Shares surged $17.75 to $92.74 and options volume in the Birmingham, AL metals and minerals company is 58,000 calls and 18,000 puts. Typical volume is about 7,700 contracts. September 100, October 110 and October 115 calls are the most actives. Meanwhile, implied volatility in the options on the stock is up 32 percent to 95.