Between a Rock and a Hard Place 09-12-2011

Cusick's Corner
This market is caught between a rock and a hard place. We have the EU banking system teetering, there's a clear removal of the Gold "Risk Off" trade, support levels in equities are clearly preparing to be challenged and lastly it is expiration week. The Germans sounded like they were preparing for immediate defaults which has led to a selloff in Gold (most likely to raise cash), indicating a hedging strategy is not in play but a raising of capital is. On the S&Ps, I will be watching the 1225 level intraday to see if breached. Volatility will continue to be high not just because of the negative headlines but also the fact that anyone of these governments could unleash a yet to be revealed but they really do exist stimulus packages. See you After Hours.

With no economic data or earnings to drive the morning trading, the early focus is back on Europe Monday. France's CAC 40 Index was hammered for a 4 percent loss on concern Moody's could soon downgrade credit ratings of French banks. A lack of solutions to help Greece is also weighing in Eurozone equity markets. Germany's DAX lost 2.3 percent and Spain's IBEX gave up another 3.4 percent. With not much domestic news to guide the action, Wall Street followed European equity markets lower at the open. The decline has been orderly, however, and Dow Jones Industrial Average is down 93 points midday. The tech-heavy NASDQ managed modest gains in morning trading, but recently down 10 points. CBOE Volatility Index (.VIX) is up 3.37 points to 41.9. Overall options volume is light today, but reflects the cautious underlying sentiment. 4 million calls and 5.1 million puts traded across the exchanges through 12:30pm ET.

Bullish Flow
Qualcomm (QCOM) shares are seeing relative strength today and have added 14 cents to $50.54. Noteworthy options trades on the chipmaker Monday include a January 50 - 40 put spread, apparently sold at $2.94, 8200X. Another 1800 traded at $2.98. These put spreads are not necessarily bullish plays, but appear to reflect expectations that shares will hold above $50 through the January expiration. If not, the strategist could face assignment on the Jan 50s and be asked to buy the stock at that price. QCOM has performed relatively well over the past few weeks and is up 9.2 percent since August 22. Today's spread seller seems to be expecting steady trading in the name in the months ahead.

General Growth Properties (GGP), a Chicago-based Real Estate Investment Trust [REIT], is up 2 cents to $12.08 and one strategist sold 816 October 11 puts on GGP at 48 cents to buy 816 October 13 calls at 48 cents. This bullish combination, at even money, has traded 1420X and appears to be a new position in the name. The stock is down 28 percent since July and today's risk-reversal is probably a bet that shares will rally beyond $13 through the October expiration. If instead GGP falls below $11 and the position is not closed out before the expiration, the contract will be assigned and the strategist will be asked to buy shares (have the stock put to them) at that price.

Bearish Flow
Bank of America (BAC) is down 2 cents to $6.97 after announcing plans to cut 30,000 jobs and is one of twenty-seven Dow stocks trading lower today. BAC is now down in six of this month's seven trading sessions and has lost 14.8 percent so far in September. Overall options volume in the bank is not impressive today, with 130K calls and 134K puts traded so far. Typical volume in BAC through midday is almost 500K. Meanwhile, the top options trades in the bank include a spread, in which the strategist apparently bought 10,000 BAC December 7 puts at $1.14 and sold 10,000 December 4 puts at 27 cents. The spread, for an 87-cent net debit, appears to be a bet that weakness in Bank of America shares will continue and the stock might move towards $4 through the December expiration. However, the bearish spread might also be a closing trade, a hedge, or a position adjustment as well.

Heavy trading continues in the CurrencyShares Euro Trust (FXE). Shares, which track the EUR/USD currency pair X100, have lost another 61 cents to $135.48 and are off 3.6 percent since Wednesday. 53,000 puts and 5,680 calls traded on the ETF so far today. One of the top trades is a spread, in which the strategist apparently bought 1,540 December 130 puts at $2.78 and sold 1,540 December 125 puts at $1.68. This Dec 130 - 125 put spread, for a net debit of $1.10, appears to be a bearish play targeting a move to $125.00 on the FXE through the December expiration, which represents a decline of another 7.7 percent (to 1.25) in the EUR/USD currency pair.

Unusual Volume
Dow Jones Industrial Index (.DJX) options volume is running 7X the (22-day) average, with 42,000 contracts traded and put activity accounting for 51 percent of the volume.

CurrencyShares Euro Trust (FXE) options volume is 2X the average daily, with 58,000 contracts traded and put volume representing 90 percent of the activity.

Deutsche Bank (DB) options volume is running 2.5X the average daily, with 19,000 contracts traded and put volume representing 91 percent of the total volume.

Increasing options activity is also being seen in ARM Holdings (ARMH), Cavium Networks (CAVM), and American Tower (AMT).

Implied Volatility Mover
Intel (INTC) implied volatility is moving higher ahead of the company's Developer Forum. The event kicks off tomorrow and lasts through Thursday evening. Shares are up 26 cents to $19.95 and the best gainers in the Dow Jones Industrial Average today. The top options trades look like a hefty premium purchase, in which the strategist bought 11,100 September 20 puts on Intel at 34 cents and bought 11,100 September 20 calls at 33 cents. The straddle, for a 67 cent net debit, is possibly a play on volatility around the event. September options expire at the end of this week. Implied volatility in INTC options has moved up 8 percent to 37.