What's Left for the Fed? 09-08-2011

Cusick's Corner
With still no idea of what, if any, bullets the Fed might pull, the market ends on the worst levels of the session. There was a mention of some kind of tool set that the Fed has but there were no details and that is probably why the market did not ramp up on the downside. I did lighten up into the After Hours on my exposure to the Banks, got out of some of my Sept credit spreads in this sector in front of the Jobs speech and continuing concerns over the EU banks. This is a choppy environment -- I will be potentially trading more into the evening after the President's speech.

Trading was steady on mixed economic news into midday, but then stock market averages fell after Federal Reserve Chairman Ben Bernanke failed to give details about plans for further economic stimulus. Data was in focus early in the day after the Labor Department reported that jobless claims increased by 2,000 to 414,000 last week. Economists were expecting a decline of 12,000. However, separate data showed the Trade Balance narrowing to $44.8 billion in July, from $51.6 billion the month before. The gap narrowed more-than-expected thanks to record exports of cars, airplanes and other products. Stocks traded mixed on the data in quiet market action into midday ahead of Bernanke's speech. Then, the Dow Jones Industrial Average slipped in afternoon trading as the head of the Fed implied that the Federal Reserve is ready to act, but offered no clear signs regarding what policy measures will be implemented. Volatility in the euro (see today's ETF section) seemed to weigh on Wall Street as well. At the closing bell, the Dow was down 119 points and 12 points off session lows. The tech-heavy NASDAQ gave up 19.8.

Bullish
Tellabs (TLAB), the Naperville, IL telecommunications equipment provider, added a nickel to $4.07 on the day and options volume on the stock was 6X the recent average daily. 7,650 calls and 102 puts traded in the name. The activity was heavily concentrated in the December 4 call options on TLAB. 7,166 traded against open interest of 436 contracts. The activity included a morning buyer of 6,513 contracts at 50 cents each. The opening call buy looks like a bullish play on TLAB. The company presented yesterday at a Citi Global Technology Conference. The presentation might have motivated one or more investors to take position in the at-the-money December call options on the company's stock Thursday morning.

Bullish trading was also seen in Micron Technology (MU), Patriot Coal (PCX), and Gannett (GCI).

Bearish
Assured Guaranty (AGO) was under pressure and puts on the Bermudian surety and title insurance company were busy today. AGO lost 89 cents to $12.07. Meanwhile, 9,400 puts and 1,000 calls traded in the name. The activity included morning buyers of September 13 puts at prices ranging from 81 to 87 cents. The stock was around $9.60 at the time and the came under pressure during the second half of trading. At the end of the day, 8,267 AGO September 13 puts had changed hands against open interest of 1,711 contracts. After the late day drop in the stock price, the market on the contract had increased to $1.17 to $1.22.

Bearish trading was also seen in Ensco (ESV), Ventas (VTR), and RR Donnelly (RRD).

Index Trading
In contrast to the record setting session one-month ago, volume has been very light in the options market this week. 591,000 calls and 727,000 puts traded on the S&P 500 Index (.SPX), the S&P 100 Index (.OEX), and other cash indexes today, which is only about 68 percent the recent average daily, according to Trade Alert data. The S&P 500 lost 12.72 points to 1,185.90 and CBOE Volatility Index (.VIX), which tracks the expected volatility priced into SPX options, finished the day up .94 to 34.32. VIX is up 8.5 percent month-to-date, but well off the 15-month high of 48.0 set one month ago during the panic market sell-off of August 8, 2011. At 34.3, VIX continues to reflect relatively high levels of investor anxiety, but not the extremes seen in the first week of August. Both volume and volatility have eased considerably since that time.

ETF Action
CurrencyShares Euro Trust (FXE) saw heavy trading on a rough day for the European currency. Against the buck, the euro is down 1.5 percent to 1.388 today. The EU/USD had previously held support around 1.4 and when that technical level was violated Thursday, the move triggered a volatile intraday slide in the EUR. Meanwhile, FXE, which tracks the EU/USD currency pair (X100), lost $2.16 to $138.34. Trading in the options on the ETF was heavy. 14,000 calls and 80,000 puts traded on FXE today. The top trades of the day were part of a spread, in which the strategist bought 7,500 October 135 puts at $1.76 and sold 7,500 October 130 puts at 75 cents. In other words, an Oct 135 - 130 put spread was initiated for $1.01 and the bearish spread is possibly a bet that the euro is now ready to run to 1.30 against the buck through the October expiration.