Engulfed 09-06-2011

Cusick's Corner
Engulfed, the market turned tail into the After Hours and reversed the fortunes of the early morning pullback. APPL/AMZN/IP/JCP were just a few of the names where the reversal in their early morning trends was the strongest. If you look at the Charts of these names, their action completely engulfed the action from Friday, flagging a potential turn in directional basis. While I need confirmation in the action of these underlings tomorrow, I use this as a signal that peak my interest and I may use the very strategies that I discussed in the Midday. The move at the end of the day has taken some of the fear out of what was looking like a scared market. But the reality is we are still in a down trend, and while I take advantage of trading volatility strategies, today bullish set ups were more readily apparent, I am still aware of the fact that the trend in the general market is still down. See you Midday.

Market Recap
Stock market averages fell, but pared losses in afternoon trading and finished well off session lows. Trading was volatile early. While US markets were closed for Labor Day, stock markets fell 4 percent across the Eurozone Monday on concerns about ongoing debt problems in Greece and Italy. The sell-off overseas set an ominous tone for trading on Wall Street Tuesday. Meanwhile, in the US, some of the early focus was also on the financials after Federal Regulators filed lawsuits against seventeen major US banks related to soured mortgage securities. JP Morgan and BofA (BAC) were among the Dow's biggest losers. On the economic front, data included a better-than-expected reading from the ISM Services Index. The gauge of economic activity outside of manufacturing rose to 53.3 in August, from 52.7 the month before. Economists were expecting a decline to 51. The data had little market impact, however, and the Dow Jones Industrial Average was deep under water through midday. However, some buying interest surfaced in the second half of trading and, at the closing bell, the Dow was down 101 points, but 206 points off its worse levels. The tech-heavy NASDAQ also finished well off session lows and lost just 6.5 points on the day.

Today's Bullish Trading
Overstock.com (OSTK) shares dipped to a new 52-week low of $9.46 in morning trading, but moved higher in afternoon action and finished the day flat at $9.82. Options volume in the Salt Lake City, UT catalog and mail order retailer was 4,200 puts and 35 calls. By way of comparison, typical volume in OSKT is about 110 contracts. Today's action was heavy concentrated in September 10 puts and included a 3,600-contract block at 60 cents when the market was 60 to 80 cents. 4,200 traded total against 394 in open interest. So, it appears that put sellers were opening new positions in the Sep 10 options on Overstock. The contract is 18 cents in-the-money and the strategist is possibly looking for shares to move back beyond $10 through the September expiration, which is in 10 days. If not, the put seller is on the hook to buy the stock at $10 during that time. If the contract is sold at 60 cents, the downside breakeven at expiration is at $9.40 or just (six cents) below the 52-week low set today.

Bullish trading was also seen in AOL (AOL), Temple Inland (TIN), and Citigroup (C).

Today's Bearish Trading
(UBS) fell $1.46 to $12.34 and touched new 52-week lows today on a tough week for shares of major European banks. Options volume in UBS Tuesday was about 10,000 puts and 2,380 calls. The top options trades in the name were part of a spread, in which the strategist sold 1,100 January 15 puts at $3.28 and bought 1,100 January 10 puts at 83 cents. In other words, the Jan 15 - 10 put spread was sold on the Swiss bank at $2.45. It traded more than 2500X on the day and appears to be rolling activity. That is, the strategist is selling-to-close a position in the in-the-money Jan 15s and opening a new position in the out-of-the-money Jan 10 puts. The investor might have correctly anticipated the recent slide in shares and is now taking a new position in anticipation of additional losses in UBS shares.

Bearish trading was also seen in Host Hotels (HST), ISIS Pharmaceuticals (ISIS), and Vimpel Communications (VIP).

Index Recap
US Dollar Currency Euro Index (.XDE) lost 2.08 to 139.97 after the euro fell on worries about the spreading debt problems across the Eurozone. XDE, which tracks the price action of the EU/US Dollar currency pair is now testing an important technical area near 140 (1.40 on the EU/USD pair). Some players were active in XDE options today, as volume hit 3X the average daily. 3,335 puts and 130 calls traded in the product today. December 145 puts were the most actives. 2,400 traded, including multiple lots traded on the $7.05 bid. The contract is now more than 5 points in-the-money and some investors might be selling the contract on the view XDE will hold around these levels and possibly move higher from here.

Analyzing the ETF Market
While some investors were focused on the US Dollar Currency Euro Index, others were busy trading the CurrencyShares Euro Trust (FXE). Both products track the EU/USD Pair (X100), but while XDE is a cash-settled index, FXE is an exchange-traded fund. Shares of the ETF can be bought and sold like stock and therefore options on the fund settle for shares (XDE and other index options settle for cash). FXE lost $1.93 to $139.46 on the session and options volume in the fund was 3X the average daily. 17,000 calls and 47,000 puts traded on the ETF. March 120 puts were the most actives. 6,000 traded and some investors might be taking positions in these deep OTM puts on the view that the euro will continue to lose ground against the dollar through March 2012.