Cusick's Corner 02-26-2013

Yesterday's sharp drop was a classic counter-trend, and while scary at first, historically it's not a trend changer. I think that yesterday's move was catalyzed by Italy's political and economic debacles, some hedge funds got caught in a currency pinch where they bought Italian bond debt with Euros that were paid for with cheap Yen. When the Yen popped into the close, their levered positions now were over levered and these funds were in need of liquidity because they most likely did not hedge the Yen move soon enough. The pullback late yesterday could have been some liquidation to raise some capital, so I am not looking it as a trend changing event. See you After Hours.
Stock market averages opened higher, but trading has turned mixed through midday Tuesday. Home Depot (HD) gained 5.7 percent and is leading the Dow Jones Industrial Average higher in the wake of its earnings report. Economic data also helped after a report on Consumer Confidence was up to 69 for February, from 58.4 and well above expectations of 62. New Home Sales printed at an annual rate of 437K for January, from 378K and better than the 383K that was expected. However, trading turned sluggish after big losses were suffered across the stock market yesterday on reports Italy's elections yielded a hung parliament. The concern seems to be that the political uncertainty in Italy will thwart recent efforts to bring stability to the financially-troubled Eurozone region. In the US, the focus is also on Bernanke's testimony to Congress Senate today, as well as ongoing anxiety about the potential impact from the March 1 sequester deadline facing Washington. Crude oil is down 51 cents to $92.60, but gold and Treasury bonds are seeing "flight-to-safety" gains for a second day. On Wall Street, the Dow Jones Industrial Average is up 42 points, but the NASDAQ dropped another 10.3. CBOE Volatility Index (.VIX) is down .78 to 18.21 after a nearly 35 percent surge yesterday. Options trading is active and continues to reflect a cautious underlying tone. 3.9 million calls and 4.3 million puts traded through 11:30am ET.
Bullish Flow

Chesapeake (CHK), the Oklahoma City, OK oil and natural gas company, is up 36 cents to $19.48 in active trading of 11.8 million shares. Options on the stock are busy as well. 36,000 calls and 8,500 puts traded in CHK so far. Some of the activity surfaced very early in the day and was focused on the Weekly 19.5 calls, which are now nearly at-the-money and expire at the end of the week. 15,470 contracts now traded against 494 in open interest. March 19 calls, Weekly 20 calls, and Weekly 20.5 calls on CHK are actively traded as well. The company announced a $1.02 billion Mississippi Lime joint venture yesterday and reported earnings last week.
Level 3 Communications (LVLT), a Broomfield, CO communications company, is off 4 cents to $20.08 on very light volume of 335,000 shares. Yet, options volume is running 2X the daily average for the name. 4,760 calls and 120 puts so far. One block of 3,950 Jun 27 calls traded for 25 cents per contract when the market was 15 to 25 cents. Volume at that strike is now 4,000. Jun 22 calls are the second most actives in LVLT today. 690 contracts changed hands. The interest in calls on LVLT comes after a rough two weeks for shareholders. LVLT is down 18.6 percent since reporting earnings on 2/12.
Bearish Flow

VALE is down 4 cents to $17.97 and options order flow on the stock is lopsided today. 15,000 puts and 4,800 calls traded on the Brazilian metals and minerals company so far today. Most of the activity has been in smaller lots and focused on March 16 puts. The largest is 775 contracts for 11 cents per contract when the market was 10 to 11 cents. More than 10,000 now traded against 8,600 in open interest. Implied volatility is moving up 3.5 percent to 47.5 and some investors might be hedging stock with puts for fear of further losses in VALE. The stock has already suffered an 8-day 10 percent losing skid.
SPDR Financials (XLF) has seen seesaw action today and is now flat at $17.26 in heavy trading of more than 47 million shares. Trading in the options on the ETF is busy today as well. 136,000 puts and 43,000 calls so far. The top trade is a 37,000-contract block of June 16 puts for 34 cents when the market was 31 to 34 cents. Later, 20,000 more traded for 38 cents. Since XLF is a fund that holds all of the financial-related names in the S&P 500, an investor with a large portfolio of stocks might be buying the June 16 puts to help hedge the risk of additional volatility in the sector through mid-June.
Unusual Volume

Home Depot (HD) options volume is running 4X the (22-day) average, with 73,000 contracts traded and put volume accounting for 56 percent of the volume.
MetroPCS (PCS) options volume is 2.5X, the average daily, with 36,000 contracts traded and call volume representing 100 percent of the activity.

Radian (RDN) options volume is running 4X the average daily, with 20,000 contracts traded and call volume accounting for 54 percent of the activity.
Increasing options activity is also being seen in Avago Tech (AVGO), Clearwire (CLWR), and Autodesk (ADSK).
Implied Volatility Mover

Implied volatility in the options on Tyson Foods (TSN) is moving higher, as the stock falls on cautious commentary from the poultry company at an Agribusiness conference Tuesday. TSN is off $1.40 to $21.86 on increasing volume of 7.3 million shares. Meanwhile, 1,835 calls and 2,840 puts traded in the name. The flow is scattered across a number of different strikes. June 25 calls, April 20 puts, and January 22 puts are the most actives and 30-day implied volatility in the options on the stock was up 16 percent to 30.
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