Twist & No Shout 09-21-2011

Cusick's Corner
The Fed has rolled out operation "Twist", selling the short end of the curve and the buying longer end, trying to flatten the curve and spark longer term lending. The action and statement by the Fed was expected and left the potential for further QE if the data from housing or employment continues to worsen. The Dollar is on a tear, DXZ11 78.045 +.51, and equities are challenging support into the close, 1180 on the S&Ps, and the market got what they expected, it definitely did not get the dream package that would get the bulls to run the streets. So with no strong action or language about future action, the market is going to be very choppy and data is going to be scrutinized very closely. See you Midday.

Stocks traded mixed ahead of a Federal Reserve Open Market Committee [FOMC] announcement on monetary policy. Hewlett Packard (HPQ) was up on reports the company's Board is considering ousting the current CEO. Oracle (ORCL) and Adobe (ADBE) also helped the tech sector on the heels of better than expected earnings. On the economic front, data released Wednesday morning showed sales of existing homes improving to a 5.03 million annual rate in August, which was up from 4.67 million and also better than the 4.7 million that economists had expected. Stock market averages held steady on the data and, while the Dow was modestly lower at midday, the tech-heavy NASDAQ had managed a small gain. However, sellers surfaced in afternoon action at the conclusion of the Federal Reserve's latest meeting on monetary policy. As expected, officials announced an Operation Twist strategy designed to keep long-term rates at low levels. The plan is to sell $400 billion in short-term bonds and buy long-term Treasurys for the Fed's portfolio. Investors seemed to be anticipating something more significant, as stock market averages suffered steep losses after the details were announced. At the closing bell, the Dow Jones Industrial Average was down 284 points and the tech-heavy NASDAQ had lost 52.

Bullish
Bank of America (BAC) shares took a hit today after Moody's downgraded the bank along with Wells Fargo and Citi. BofA lost 7.5 percent to $6.38 and is now within striking distance of recent lows of $6.01 set on August 23. Bank of America options were heavily traded with 337,000 calls and 396,000 puts traded on the session. The top trade was a 48,000-contract block of January 2013 $5 puts at $1.13 per contract. The position was sold and, while open interest is sufficient to cover, the trade appears to be a new position. Today was a record volume day for the contract, with 54,758 traded. The next busiest day was on Aug 8 when 22,500 traded. Today's put writer might be willing to sell premium on the view shares will hold above $5 through 2013. If not, they would face assignment on the contract in Jan 2013 and be asked to buy the stock at that price. If so, the cost basis for the stock is $3.87 ($5 minus the credit for selling puts) plus transactions costs.

Bullish trading was also seen in Range Resources (RRC), Ultra Petroleum (UPL), and Arch Coal (ACI).

Bearish
Put volume picked up in Avon Products (AVP) today. Shares lost 72 cents to $21.01 and total options volume hit 11X the daily average. 18,000 puts and 400 calls traded on Avon today. October 19 puts, which are now 9.6 percent out-of-the-money and expiring in 30 days, were the most actives. 17,800 traded. The top trade was a 9,000 contract block at 25 cents when the market was 20 to 25 cents. Since open interest is only 198 contracts, the trade looks like an opening put purchase and possibly a bet shares will continue to move lower in the weeks ahead. AVP has already lost 20 percent since July. The stock hit a 52-week low of $20.25 on August 11 and has been trading in a narrow range since that time.

Bearish trading was also seen in Alpha Natural Resources (ANR), Forest Oil (FST), and Banco Bradesco (BBD).

Index Trading
Options action picked up in the index market today, with 643,000 calls and 1.2 million puts traded on the S&P 500 Index (.SPX), S&P 100 Index (.OEX) and other cash indexes. Increased demand for portfolio protection sent CBOE Volatility Index (.VIX) rallying 4.46 to 37.32. Meanwhile, the most actively traded contract in the index market was VIX December 25 puts. 49,100 traded. The next most actives on a volatile day for the US equity market were S&P 500 Index October 1,170 and 1,200 put options. SPX finished the day down 35.33 to 1,166.76 and some investors were likely buying puts on the S&P 500 on concerns about additional volatility for the US equity market heading into the historically turbulent month of October.

ETF Action
Options action picked up in the SPDR S&P Oil and Gas Exploration ETF (XOP) Wednesday. Shares lost $2.13 to $48.96 after crude oil gave up $2.12 to $84.80. Meanwhile, options volume in the ETF hit twice the daily average. 14,000 calls and 27,000 puts traded on the day. The top trade of the day was part of a spread, in which the investor sold 7,000 December 59 calls on the fund to buy 7,000 December 49 - 43 puts spreads. 35 cents was paid on the three-way and seems to be a bearish bet on the energy sector. XOP is a fund that holds mid-sized names from the industry like Anadarko, Southwest Energy and Northern Oil and Gas.