Trading Volatility 05-03-2011

Cusick's Corner
With the market teetering on a potential short-term pullback and volatility on the move, strategists may want to brush up on in-the-money calendar spreads. If you are short-term bearish and long-term bullish, selling the front month in-the-money option against the longer term long option gives the strategist the potential to collect time decay and mitigate premium risk on a pullback when markets become uncertain. If your sentiment is bearish and your interpretation of implied volatility is high - check out our Chart Patterns to confirm technical bearish sentiment and review the Volatility View to get a better interpretation of Implied Volatility to help determine whether it is high or low. See you Midday.

The Dow Jones Industrial Average eked out a small gain, but the overall tone of trading was cautious Tuesday. A number of companies, including Pfizer (PFE), Clorox (CLX) and Molson Coors (TAP), traded lower on uninspiring earnings news. Meanwhile, some of the commodity-related names faced selling pressure after crude oil lost $2.44 to $111.08 a barrel and gold gave up $18.7 to $1,538.40 an ounce. On the economic front, the only economic stat of the day showed Factory Orders up 3 percent in March, which was better than the 1.8 percent that economists were expecting. The market didn't react to the data. Instead, much of the focus was on earnings and commodities prices. While the Dow Jones Industrial Average was able to battle back from afternoon losses and post a 1-point gain on the session, the tech-heavy NASDAQ lost 22.5 points.

Bullish
Some of the mortgage insurance names saw increasing call volume today. MGIC Investments (MTG), for example, added 4 cents to $8.74 and options volume included 8,060 calls and 385 puts. The top trade of the day was a 2,520-contract block of January 12.5 calls at the 31-cent asking price. At the end of the day, 3,700 contracts traded. May 9 and January 15 calls were also active. Meanwhile, Radian (RDN) and Assured Guaranty (AGO), which are two names in the same space, saw increasing activity as well. There was no obvious industry news to explain the bullish trading. It might be a play on earnings. Radian is due to report results on May 5. Assured Guaranty reports next week.

Bullish trading was also seen in Sirius XM Radio (SIRI), Xerox (XRX), and Alcoa (XRX).

Bearish
Alpha Natural Resources (ANR), an Abington, VA coal producer, lost $2.39 to $55.18 after the company reported a 65 cent per share quarterly profit. Economists were looking for 74 cents per share. Options in ANR were actively traded as well. 28,000 calls and 12,000 puts traded in the name. The top trade of the day was part of a strangle. The investor bought 3,000 June 57.5 calls at $1.72 and bought 3,000 June 52.5 puts at $1.79. They paid $3.51 per strangle. It's not necessarily a bearish play, but a bet that ANR will continue to see high volatility between now and the June expiration. Note that the stock is almost exactly midway between the two strike prices, which if often the case when long strangles are initiated.

Bearish flow also surfaced in Chiquita Brands (CQB), Universal Health Services (UHS), and Health Management Associates (HMA).

Index Trading
The CBOE Volatility Index (.VIX) is on a three-day winning streak. The volatility index gained .71 to 16.70 and is now up 17 percent from the 52-week lows set last week. VIX has been moving higher in recent days ahead of key jobs data due out later this week. Earnings news has been mixed and some of the recent volatility in the commodities market might be spilling over into equities as well. Meanwhile, VIX call options saw a bit more interest today as well. 229,000 contracts traded, which compares to 90,000 puts on the VIX. May 25 calls were the most actives. 44,000 contracts traded.

ETF Action
iShares Silver Fund (SLV) saw increasing volatility and high options volume today. Shares, which represent ownership in the white metal, gave up $2.25 to $40.58 after silver (July) suffered a $4.30 drop to $41.77 an ounce. In options action, 1.5 million contracts traded in the silver fund. The volume was split evenly down the middle of the options chain after 750K calls and 750K puts traded on the session. The top trade was a block of 20,000 January 2013 35 puts at $5.15 per contract. The position is possibly a hedge or an outright bearish bet on silver. Even after its recent slide, SLV is up 54.7 percent since late-January.