Italy Starts to Make Greece Look Good 11-09-2011

Cusick's Corner
We've had loose and wide trading ranges over the last week, the S&Ps retracing 78% low to high in the last week. As I mentioned in the Midday, the psyche of the trader is uncertain and the market has given little clarity. Most notably today in currency action was the Euro and the breakdown below 1.36, which shook confidence in equities, creating a flight to safe havens into products like bonds and the Dollar where the action is to the upside. This also continues to pressure the commodities, Crude most notably, and may pressure Gold as well. Earnings are heavy and if you are looking at strategic approaches to these types of events, may consider looking at either a Strangle or Straddle, especially if you project a move greater than the Expected Move (ATM Straddle+ 1 strike out Strangle/2=EM). This is how you can help view volatility into an event with a bit more clarity. Tomorrow watch the Claims data tomorrow; this could give a good pulse of the consumer. See you After Hours.

Fears about the still-unfolding European Debt Crisis rattled investors Wednesday. The table was set for morning weakness on Wall Street after Italian bond yields hit a key level of more than 7 percent. The rise in yields sparked renewed concerns about the depth and severity of the European Debt Crisis and sent the EUR/USD currency pair sliding more than 2 percent. European stock indexes also suffered losses. Germany's DAX paced the decline with a 2.2 percent drop. Events on the other side of the Atlantic continue to overshadow the domestic economic news, which included a surprise .1 percent drop in Wholesale Inventories for September. Economists were looking for a .5 percent increase. The data didn't matter much. The Dow Jones Industrial Average was down more than 200 points at midday and the decline gathered additional momentum Wednesday afternoon. At the closing bell, the Dow was down 389 points. The tech-heavy NASDAQ took a 105-point hit.

Bullish
Universal Display (PANL) bucked the bearish trend today. The Ewing, NJ computer component-maker specializes in production of Light Emitting Diodes (OLEDs) for flat panel displays. Shares gained 35 cents to $49.79 and options volume was 3X the daily average, after 7,580 calls and 2,325 puts traded on the stock. The top trades of the day were part of a spread, in which the strategist apparently bought 1,000 November 55 calls on PANL for $3.30 and sold 1,000 November 60 calls for $1.20. The spread, for a $1.10 net debit, is a bullish play with a potential $3.90 payoff (excluding commissions) if shares traded above $60 at the November expiration, which is at the end of next week. The entire debit is at risk if the position is held at the expiration and PANL fails to move beyond $55. The spread was initiated when the stock was up around $55 in morning trading and is not working out too well so far. The market on the spread is now 90 cents.

Bullish trading was also seen in American Superconductor (AMSC), Skyworks Solutions (SWKS), and Salix Pharmaceuticals (SLXP).

Bearish
Netease (NTES) loses $3.19 to $44.29 and options order flow on the Chinese Internet company was bearish today, with 28,000 puts and 8,380 calls traded on the stock. November 40 puts, which are 9.7 percent out-of-the-money and expire in 9 days, were the most actives. 14,838 traded and some blocks traded on the bid, suggesting put writing in NTES today. Beyond that, however, the flow seemed to include a substantial amount of put buying in November 42s, 43s and 44s. Implied volatility in the options on the stock jumped 15 percent to 61.5. Relative weakness in the underlying shares, high put volume and increasing implied volatility are all signs of bearish sentiment towards Netease. Some pre-earnings jitters might be setting in. The company is due to report on November 16, which is a few days before the November options expire.

Bearish trading was also seen in Caterpillar (CAT), ING, and Blue Nile (NILE).

Index Trading
CBOE Volatility Index (.VIX) surged Wednesday! The market's "fear gauge" jumped 8.68 points, or 32 percent, to 36.16 and recorded its fourth largest one-day percentage gain for 2011, surpassed only by the big spikes on 8/4, 8/8, and 8/18. Still, VIX remains almost 25 percent below the highs of 48 seen in August. In addition, volume in the VIX pits is nowhere near the levels seen during the panic three months ago. 272,000 calls and 672,000 calls traded in the VIX pit on August 8. 321,000 calls and 200,000 puts traded in the product today, led by December 40 and 45 calls, which traded 35,700 and 52,040 contracts, respectively. So, while some players might be bracing for further gains in VIX and buying December upside calls on the index, the overall action in the volatility index is not yet consistent with the extreme fear and negativity that gripped the markets in August.

ETF Action
ProShares Ultra Short S&P 500 (SPXU) saw increased activity Wednesday. Shares, which move 2X the inverse of the S&P 500, added $1.47 to $14.88. Meanwhile, options volume in SPXU hit two times the typical levels. 13,000 calls and 2,710 puts traded on the exchange-traded fund. November 19 calls, which are 27.7 percent out-of-the-money and expire at the end of next week, were the most actives. 2,470 traded, and with 95 percent of the volume trading at the Ask, it seems that call buyers were dominating the flow. Open interest is 1,063 and so the activity looks like opening activity. If so, November upside call buying in SPXU reflects bearish short-term trading. November options expire at the end of next week and the calls will increase in value if SPXU makes a significant move higher before the expiration - i.e. the S&P 500 makes a big move lower over the next nine days.