Stocks Took a Breather 07-20-2011

Cusick's Corner
Stocks took a breather, a little profit taking after yesterday's rally. Financials led the day on news from E-Trade (ETFC) and US Bancorp (USB). The Financial Select Sector ETF (XLF) was up +1.14% to close at 15 and the option volume was almost 80% higher than the average daily volume. Traders overall are continuing to focus on earnings and the debt talks both here and abroad. There are still lots of earnings coming out - check the earnings calendar in your optionsXpress account and set up some earnings alerts. See you Midday.

Stock market averages finished with small losses on a day of slow trading Wednesday. The table was set for morning gains on Wall Street after Eurozone stock benchmarks moved higher for a third day and Apple Computer (AAPL) posted earnings that easily beat Street estimates. Textron (TXT), ST Jude Medical (STJ), and VMWare (VMW) also traded higher on profit news. However, United Technologies (UTX) lost 1.8 percent and was the biggest loser in the Dow Jones Industrial Average after its earnings fell short of some expectations. The Dow was also weighed down by poor housing data Wednesday morning. The latest Existing Home Sales report showed a decline to an annual rate of 4.77 million for June, from 4.81 million the month before and short of the 4.93 million that economists had expected. The Dow Jones Industrial Average moved lower on the news, but the decline never gathered any real momentum. Instead, trading was somewhat aimless in the second half of the session and the Dow closed with a modest 15-point loss. The tech-heavy NASDAQ gave up 12.3 points.

Bullish
Five of today's top ten most actively traded equity options were call options on Bank of America (BAC). Shares, which touched new 52-week lows of $9.40 yesterday after earnings were released, added 2.9 percent to $9.85 and were the best gainers within the Dow Jones Industrial Average Wednesday. Some investors seem to expect the rebound to continue, as trading surged in BAC out-of-the-money calls today. Total volume in options on the bank was 504,000 calls and 206,000 puts. September 10 calls, which are now 15 cents OTM and expiring in 58 days, were the most actives with 64,741 contracts traded. January 12.5 calls also traded more than 60,000 contracts. 50,300 Weekly $10 calls, which expire in two days, changed hands. Meanwhile, the September and January $11 calls in BofA both traded more than 40,000X.

Bullish trading was also seen in Pulte Group (PHM), Archer Daniels Midland (ADM), and Interdigital (IDCC).

Bearish
Ford Motor (F) lost a penny to $13.08 and 55,000 puts traded on the automaker today. Typical put volume in Ford is about 37,000 contracts. One noteworthy spread traded at 1:00pm ET when an investor apparently bought 7,500 August 14 puts at $1.13 and sold 15,000 August 13 puts at 47 cents. That is, they initiated an August 14 -13 (1X2) put ratio spread for a 19-cent net debit. If an opening transaction, this spread offers a potential 81-cent payout (excluding commissions), if shares settle at $13 at the August expiration which represents an 8-cent decline from current levels. The debit is at risk if shares move beyond $14 through the expiration and all the puts expire worthless. There is additional risk to the downside because only half of the $13 puts (which were sold) are covered by the $14 puts. This put ratio spread trader is possibly a willing buyer of Ford stock and willing to face assignment on the short puts which would require buying the stock at $13.

Bearish flow also surfaced in Zhongpin (HOGS), Whirlpool (WHR), and Xilinx (XLNX).

Index Trading
Trading was light in the index market today, as a lot of the focus on Wall Street has recently shifted from global macro-economic events to earnings. The result is mixed trading and choppy market action for the S&P 500 Index (.SPX) and other market averages. The S&P traded in a very narrow 7-point range and lost .87 points to 1,325.86 on the day. 713,000 calls and 487,000 puts traded in the SPX, S&P 100 (.OEX) and other cash indexes, which is about 85 percent the recent average daily volume for the index market, according to Trade Alert data. Yet, while trading was quiet today, some investors seem to be bracing for an uptick in market volatility in the months ahead, as the five most actively traded index contracts today are out-of-the-money call options on the VIX: September 32.5 calls, August 30 calls, September 25 calls, October 32.5 calls and August 22.5 calls. VIX lost .12 to 19.09 on the day.

ETF Action
Put volume picks up in the iShares Real Estate ETF (IYR) Wednesday. This exchange traded fund holds a basket of Real Estate Investment Trust [REITs] and shares of real estate companies. IYR added 46 cents to $62.15 and is making a run back towards the 52-week highs of $63 seen on July 7. One strategist seems to be bracing for some weakness, however, and bought a 29,000-contract block of December 50 puts on the real estate fund at 85 cents on the International Securities Exchange. Data from the ISE confirm that an investor bought-to-open the position. At the end of the day, volume in the contract approached 40,000 contracts. The December 50 put on the IYR fund is 19.5 percent out-of-the-money and expires in 149 days.