Market Doing Laundry 09-30-2011

Cusick's Corner
The market has headlines to absorb but it is not about the EU but rather China and the East are weighing on macro minds. There is some pressure on financial names, most notably Morgan Stanley (MS) (I have a small bear put spread in this name), due to exposure to Greece and French banks. This is what the market looks like after washing out the weak longs yesterday and squeezing out the weak longs today. We can now expect some chop into the close, especially with this being the end of the month today. The data this morning was a nonevent; I am sitting tight at this stage but looking to potentially add some bearish positions in Tech, looking at the chips right now. See you After Hours.

The third quarter is ending on a down note. The table was set for losses on Wall Street Friday morning after stock indexes fell across the Eurozone and the euro lost 1 percent against the buck. Disagreement among EU officials about plans to resolve the debt crisis has rekindled worries about problems across the Atlantic. Germany's DAX paced the decline with a loss of 2.5 percent. The day's domestic economic news was mixed. Personal incomes fell .1 percent and spending rose .2 percent in August. Economists were expecting gains of .1 percent and .2 percent, respectively. However, the latest Chicago Purchasing Manager's Index [PMI] unexpectedly jumped to 60.4 in September, from 56.5 the month before and better than the 54.0 that was expected. The University of Michigan Consumer Sentiment index finished September at 59.4, from 57.8 mid-month and better than the 57.5 that was expected. Yet, stocks are lower despite some improved economic data. Through midday, the Dow Jones Industrial Average is down 110 points and the tech-heavy NASDAQ lost 35.4. CBOE Volatility Index (.VIX) jumped 2.43 points to 41.27. Overall options volume is light and reflects the cautious underlying tone, with 4 million calls and 4.4 million puts traded across the exchanges through 12:45pm ET.

Bullish Flow
Bank of America (BAC) is down 2.4 percent to $6.20 and one of twenty-five Dow stocks under water midday Friday. BAC is set to close the third quarter not far from it's 52-week low of $6 set intraday on September 22. Shares of the banking giant lost 43.5 percent for the quarter. At least one player in the options market seems to be anticipating a rebound over the next several quarters and initiated a bullish longer-term play on the bank Friday morning. The investor bought a 19,000-contract block of January 2013 $7.5 calls on BofA at $1.52 per contract. The 7.5 call is now 21 percent out-of-the-money and, if bought at $1.52, has an upside breakeven at expiration at $9.02 (+53.6%). The investor might be anticipating a rebound in the bank during the fourth quarter and throughout 2012, but rather than buying stock they are buying the right to purchase or "call" the stock at $7.5 per share.

USEC (USU), a Bethesda, MD provider of uranium to power plants, is down 11 cents to $1.68. Shares are falling to new 52-week lows today and are down 51 percent since July. Options volume today includes 6,300 calls and 540 puts. The action is focused on October - November 2.5 call spread trading, in which the strategist was selling Oct 2.5s at a nickel and buying Nov 2.5s for 25 cents. It appears to be rolling activity. That is, the strategist is closing out a bullish position in October 2.5s, which are now almost 50 percent out-of-the-money. They're buying Nov 2.5s to open and giving the trade one more month to play out.

Bearish Flow
Vulcan Materials (VMC) shares are trading down $1.10 to $27.84 and options volume in the Birmingham, AL building materials company is running 4X the daily average. 12,000 puts and 2,150 calls traded in VMC so far. The top trades are part of a spread, in which the strategist apparently sold 2,500 November 37 puts at $10.22 and bought 2,500 November 32 puts at $6.20. The spread, for a $4.02 net credit, has traded 5,000X and is probably rolling down in strikes. After a 38.4 percent decline in VMC shares since April, the strategist is exiting a profitable position (or protective put hedge) in the deep in-the-money 37s and now opening a new one in the 32s, which are not so far in-the-money.

iShares Dow Jones Real Estate ETF (IYR) is down 61 cents to $51.33 and one strategist initiates a November 50 - 45 put spread on the fund at $1.40, 5000X. That is, Nov 50 puts were bought at $2.75 and Nov 45s sold at $1.35. The spread offers its best payoff if shares fall an additional 12.3 percent through the November expiration (49 days). IYR is a fund that holds a basket of Real Estate Investment Trusts [REITs] and shares of companies involved in the real estate market. Shares lost 14.8 percent in the third quarter and today's spread trader seems to be bracing for additional losses to start the fourth.

Unusual Volume
CREE options volume is running 3X the (22-day) average, with 65,000 contracts traded and call activity accounting for 59 percent of the volume.

Focus Media (FMCN) options volume is 3X the average daily, with 24,000 contracts traded and put volume representing 73 percent of the activity.

Ingersoll Rand (IR) options volume is running 5X the average daily, with 20,000 contracts traded and put volume representing 63 percent of the total volume.

Increasing options activity is also being seen in Cemex (CX), UBS, and Vulcan Materials (VMC).

Implied Volatility Mover
CBOE Volatility Index (.VIX) is moving, as investors close the books on a rocky third quarter and now brace for the historically volatile month of October. VIX started moving higher in July and then saw a spike to 15-month highs of 48 on 8/8. The volatility index is up 1.92 to 40.76 today and set to finish the quarter with a gain of almost 150 percent. The volatility index finished June at 16.52, but due to concerns about the European Debt Crisis, bank exposure to loans, and a slowing global economy, risk perceptions are sharply higher at the end of September.