Market Ugly at Open vs. VIX 10-04-2011

Cusick's Corner
The market looked ugly on the open but the "Fear Index", VIX, never confirmed the move. The Volatility Index actually pulled off the highs it established on the close yesterday, 46.18, and opened at 45.95 and just bottomed at the lows of the session in the VIX at 44.12. This lack of confirmation is the very reason the bounce that has occurred into the Midday is not a surprise, but (there is always a "but") this is not the right time to jump on either side of the market with conviction. I am watching the action in the Small Caps, IWM, and Tech, QQQ, they have been the early leaders this Midday -- if they can garner any further momentum into the After Hours, the balance of the market just might follow. Gold continues to tumble as the fear or risk off trade continues, most likely in a flight to capital move. I have taken this most recent pullback to take some profits on the shorts that I had working and I am looking at scaling into some new positions, potentially in Consumer Staples (XLP), Industrials (XLI) and Energies (XLE). See you After Hours.

Another round of losses across Eurozone equity markets set the table for morning weakness on Wall Street, but stock market averages are well off session lows through midday Tuesday. European stock market averages fell again amid ongoing concerns about the banking industry and the risk of Greek debt default. Germany's DAX paced the decline with a 3 percent loss. In the US, the domestic economic news included a report on Factory Orders, which showed a decline of .2 percent for August and twice as much as expected. The market showed little reaction to the data. Instead, the Dow Jones Industrial Average fell as much as 250 points to 10,405 in morning trading. However, the decline was orderly and the Dow has since battled back to trim its loss to just 65 points. The tech-heavy NASDAQ has seen an aggressive rebound and is now up 34 points. CBOE Volatility Index (.VIX) eased back 1.76 points to 43.69. Overall options volume is very active, with 6.3 million calls and 8.1 million puts traded across the exchanges through 12:10pm ET.

Bullish Flow
AMR, which saw heavy trading yesterday on concerns about the airliner's financial strength, is trading up 34 cents to $2.32 after company executives appeared on CNBC late-yesterday and said restructuring is not their preference. The parent of American Airlines was the only major carrier not to file for Chapter 11 during the latest industry downturn and some analysts now worry that it is the most vulnerable if the economy is heading back into a deeper recession. Yet, the stock is now up 32.6 percent off Monday's lows and options volume in AMR today includes a block of 11,000 January 2013 puts sold at $1.61. Another block of 11,000 was sold at $1.67. Some investors might be selling these long-date in-the-money puts on the view that recent concerns are overblown and the stock will recapture $3 through January 2013. If not, an opening put seller would be on the hook to buy the stock at the strike price of the put options contract through the expiration.

Sirius XM Radio (SIRI) hit a morning low of $1.27, but then rallied almost 20 percent to $1.52 and is now up 3 cents to $1.48 after the company announced that all Subaru vehicles will be equipped with Sirius radios beginning with 2012 models. Trading in SIRI options is very active today. 30,000 calls and 35,000 puts traded on the stock so far. The top trade is a 15,000-contract block of December 1.5 puts at 26 cents per contract. The position was sold, according to data from the options exchange, and might reflect a view that the worst is over for SIRI. Shares have lost 37 percent since May.

Bearish Flow
Wells Fargo (WFC) is trading down 15 cents to $23.03 and more than 180,000 puts have traded on the bank so far today. By way of comparison, call volume is 24,000 contracts. The top trade of the day is part of a spread, in which the strategist bought 20,000 January 22.5 puts at $2.77 and sold 20,000 January 12.5 puts at 46 cents. In other words, a Jan 22.5 - 12.5 put spread was initiated for a $2.31 net debit, 20000X. The spread might roll or adjust an existing position, as open interest is sufficient to cover in both contracts. Or, it might be an opening out-of-the-money put spread on concerns about additional losses in the bank through January 2012. If bought-to-open at $2.31, the downside breakeven at expiration (excluding transaction costs) is at $20.19 or 12.3 percent below current levels.

SPDR Gold Trust (GLD) lost $3.47 to $157.49 after the yellow metal gave up $33 to $1,623 an ounce through midday Tuesday. GLD, which is the exchange-traded fund that holds the physical commodity, is now down 11.2 percent since August. In options action, the top trades in the ETF today include a 3,500-contract block of November 145 puts at the $3.15 asking price and a 3,500-contract block of November 165 calls at $4.55. It appears that $1.40 was collected on this risk-reversal and a shareholder might have initiated the bearish combination to hedge or "collar" a position in GLD shares.

Unusual Volume
Wells Fargo (WFC) options volume is running 2.5X the (22-day) average, with 204,000 contracts traded and put activity accounting for 88 percent of the volume.

Morgan Stanley (MS) options volume is 2X the average daily, with 125,000 contracts traded and put volume representing 53 percent of the activity.

CREE options volume is running 2X the average daily, with 53,000 contracts traded and call volume representing 96 percent of the total volume.

Increasing options activity is also being seen in Sprint Nextel (S), Williams Companies (WMB), and AMR.

Implied Volatility Mover
A number of individual stocks are seeing aggressive rebounds off 52-week lows today. For example, Focus Media (FMCN) fell to low of $15.76 Tuesday morning, but is now $3.48 to $19.81 and 25.7 percent off session lows! The surge in the stock comes after a two-week 50 percent plunge. Short covering is probably one factor underlying the stock's massive intraday move. Meanwhile, 6,600 puts and 2,865 calls have traded on the Chinese advertising agency and implied volatility fell 11 percent to 116.