Market Velocity 09-14-2011

Cusick's Corner
As I noted earlier this week, I felt that velocity was more to the upside than the downside and today it has played out that way. While there could be challenges to 1200 on the S&Ps, new resistance, I would be apprehensive placing much in the way of upside exposure -- the economic uncertainty in US and EU has put enough fear so that holding cash is the position of choice, which makes the derivative trade pick up. I continue to view volatility as expensive, VIX pulled back -2.31, and I am looking at spread trades. If bullish, consider using in-the-money call spreads or trading OTM butterflies and I would be looking at Oct now. If bearish, consider buying out-of-the-money call calendars, ITM call butterflies. Visit our Education Center -- there are strategy pathways to help you learn more about the right strategy for the right environment. Watch the Claims, CPI data followed by the Production numbers, if either number disappoints, recovery and inflation or lack thereof could put pressure on the market, taking the wind out of the sails. See you After Hours.

Stock market averages opened steady and rallied in afternoon trading to close with solid gains Wednesday. Much attention remains on Europe. The euro gained .5 percent against the buck and Germany's DAX added 3.4 percent ahead of a teleconference between French, German and Greek officials. The talks were focused on helping avoid a default by Greece. In the US, economic included data released before the opening bell that showed the Producer Price Index [PPI] unchanged in August, which was in-line with expectations. Meanwhile, Business Inventories rose .4 percent in July, and also as-expected. However, Retail Sales were flat last month. Economists had predicted an increase of .2 percent. Stocks were modestly higher on the mixed data through midday. Then, news Wednesday afternoon that France's Sarkozy and Germany's Merkel reaffirmed support for Greece sent stock market averages to their best levels of the day. At its afternoon highs, the Dow Jones Industrial Average was up 280 points. It fell off its best levels in the final twenty minutes, however, and closed the day up 141 points. The tech-heavy NASDAQ added 40.

Bullish
Staples (SPLS) shares were up today after the company's board approved a $1.5 billion stock buyback plan. Shares of the office supplies retailer added 51 cents to $14.60 and are on a three-day 7.6 percent run higher. Meanwhile, options volume in SPLS hit 3X the daily average Wednesday. 42,000 calls and 7,000 puts traded in the name - a ratio of six-to-one. The top trades were in the January 2013 $15 calls, as large blocks traded at the $2.30 and $2.35 asking price. September 15 calls, which are now 1.7 percent out-of-the-money and expiring in two days, were the most actives. 15,930 traded. Investors were apparently buying both short-term and longer-term $15 upside calls on the news, probably hoping that the buyback announcement will spark additional gains in Staples in the days ahead.

Bullish trading was also seen in Ciena (CIEN), Oshkosh (OSK), and Riverbed Technology (RVBD).

Bearish
A large block of calls trades in New York-based apparel clothing maker Ralph Lauren (RL) today. Shares touched new 52-week highs Wednesday and finished the day up $4.73 to $143.22. Options volume in RL was more than 5X the daily average. 17,000 calls and 6,270 puts traded in the name. The top trade was a block of 9,000 October 155 calls at $1.70. At the end of the day, almost 10,000 traded against 342 in open interest. Some investors were apparently selling-to-open new positions in these upside calls. It's not necessarily a bearish play, but a bet that the stock won't rally beyond $155 (8.2%) through the October expiration (37 days). A shareholder might have initiated the sale against stock as part of a buy-write or covered call strategy.

Bearish trading was also seen in Virgin Media (VMED), Rackspace (RAX), and Sunpower Tech (STP).

Index Trading
Trading volume is picking up in the index market heading into the options expiration. September is quarterly "quadruple witch" expiration - a time when options, futures, futures options, and single stock options all expire. 890,000 calls and 1.1 million puts traded across the S&P 500 Index (.SPX), NASDAQ Index (.NDX) and other cash indexes today. Since the settlement values for many (not all) index products is computed Friday morning, the Last Trade Day is Thursday before the expiration. Consequently, options volume often jumps midweek before the contracts expire. Today is no exception, with 524,000 calls and 783,000 puts traded in the SPX options pit on the CBOE today. The index gained 15.81 to 1,188.68 and Sep 1,200 calls, which are 1 percent out-of-the-money and have one trading day of life remaining, were the most actives. 61,340 contracts traded on the day.

ETF Action
SPDR Basic Materials Fund (XLB) adds 52 cents to $34.01 today and is up 3.2 percent since Monday. Options on the ETF saw noteworthy trading today. 105,000 puts and 11,000 calls traded on the fund. October 32 puts were the most actives. 50,100 traded. Another 40,000 September 36 puts changed hands. The activity might have included some rolling activity. That is, investors were closing out positions in XLB Sep 36 puts, which are $2 in-the-money and expiring later in the week. Meanwhile, they're buying October 32 puts, which are $2 out-of-the-money and expiring in 37 days. XLB is a fund that holds all of the basic material names from the S&P 500 and includes names like Alcoa, DuPont, and Monsanto. Shares are down 10.5 percent since July and today's rolling activity possibly reflects expectations for additional weakness through October.