Cusick's Corner 02-20-2013

Commodity prices are under pressure this morning. We have been waiting for Gold, GLD, to break support of $1600, and today we have that break which has placed universal stress in the commodity complex today. This has not had an impact in the equities thus far; the S&Ps are holding. Traders are digesting the Fed Notes this afternoon, there's some decent overhead resistance of 1525 and there appears to be no real nibbling at this stage. See you after hours.

Trading is sluggish on the heels of disappointing Housing Starts numbers and ahead of minutes from the January FOMC meeting, due out this afternoon. Equity markets were mildly higher across much of Asia overnight, but mixed in Europe ahead of the opening bell on Wall Street. The domestic economy was also in focus after a report showed Housing Starts at an annual rate of 890K for January, which was down from 973K and below expectations of 914K. Separately, PPI, a gauge of inflation at the wholesale level, printed at .2 percent and mostly in-line with expectations. Earnings news was mixed. While Herbalife (HLF) and MGM ticked higher on their results, Dell is flat and homebuilder Toll Brothers (TOL) is in the red. Crude oil is down 59 cents to $96.51 and it's another rough day for the gold bugs. The yellow metal dropped $24.7 to $1579.5 and six-month lows. On Wall Street, the Dow Jones Industrial Average is down 17 points and the NASDAQ dropped 12.3. CBOE Volatility Index (.VIX) is up .67 to 12.98. Trading in the options market reflects the more cautious underlying tone. 3.6 million calls and 3.6 million puts traded through 11:00am ET.
Bullish Flow

The largest block of equity options traded so far today is in oil drilling firm Halliburton (HAL). Shares are down 55 cents to $42.26 and a 40,000-contract block of January 40 puts trades on the stock at $3.35 per contract when the market was $3.35 to $3.45. Open interest at that strike price is 9,525. So, the big block appears to be a new position. An investor might have sold the puts on the view the stock will hold above $40 and, if so, they hope to pocket the premium if the options expire worthless. On the other hand, if shares fall, they are stating that they are willing to buy the stock at the $40 strike (100 shares per put option) through the January 2014 expiration. That is, they are writing the puts and so they are obligated to honor assignment if shares fall. The position can also be closed out before expiration through an offsetting purchase (unless it is assigned before it is offset).
Vodafone (VOD) drops 45 cents to $24.88 and is falling to new 52-week lows today. In options action, 15,000 calls and 4,880 puts traded in the name, a ratio of more than three-to-one. The top trade is a 3600-lot of July 25 calls for $1.15 per contract when the market was $1.10 to $1.15. More than 11,000 July 25 calls now traded on VOD against 449 in open interest. Some investors are possibly looking to take positions in the name as the stock falls to new lows, but rather than buy shares outright today, they are taking positions in options that give the right to buy [[call]] the stock (100 shares per call option) at the strike price of the contract through the expiration.
Bearish Flow

Forest Oil (FST) is seeing a second day of increased put activity. As noted in yesterday's midday report, May 6 puts on the Denver, CO oil and gas company were actively traded Tuesday and the activity created nearly 6,000 contracts of new open interest. Shares are down 14 cents to $6.21 today and the action continues. Another 6,600 contracts traded, including 1,240 contracts for 75 cents per contract on the International Securities Exchange. An investor bought the puts, to open, according to data from the all-electronic ISE, and might be attempting to hedge a position in stock with puts ahead of earnings. The company is due to report results after the closing bell.
iShares Long-term Bond Fund (TLT) adds 28 cents to $116.20 and a 22,500-contract block of April 114 puts trades on the ETF for $2.01 per contract. The same contact saw interest yesterday as well. The top trade was 18,915 contracts for $1.84 per contract and open interest increased by 24,727 contracts. Today's activity might add to those positions and seems to reflect concerns that long-term Treasury bond prices might fall, yields could rise, in the weeks ahead. The activity comes ahead of the release of minutes from the latest Federal Reserve minutes, due out Wednesday afternoon.
Unusual Volume

AngloGold (AU) options volume is running 9.5X the (22-day) average, with 30,000 contracts traded and call volume accounting for 95 percent of the volume.
Joy Global (JOY) options volume is 3X, the average daily, with 29,000 contracts traded and call volume representing 66 percent of the activity.

Nexen (NXY) options volume is running 3X the average daily, with 24,000 contracts traded and call volume accounting for 77 percent of the activity.
Increasing options activity is also being seen in Office Depot (ODP), Hecla Mining (HL), and Garmin (GRMN).
Implied Volatility Mover

Officemax (OMX) shareholders have been on a wild ride today. The day after the Wall Street Journal ran a story indicating that the company is in merger talks with Office Depot (ODP), reports out before the open indicated that Office Depot was ready to buy the company for $13.50 per share. Apparently, those headlines were pre-mature and separate reports later suggested an ODP-OMX stock deal. Shares of OfficeMax vaulted to a high of $14.92, but then erased most of the gains and are now up 18 cents to $13.16 on news Office Depot will issue 2.69 of new shares of ODP for every OMX share. ODP is down 43 cents to $4.59 and, now that the news is out, implied volatility in the stock dropped 25 percent to 55. OMX implied vols fell 14 percent to 52.5.
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