Cusick's Corner

The overall trend in today's market is down, every bounce up is being met with selling and now into the Midday, the bids are sitting on the sideline. The shorts are bearing down and I want to keep my eye on the Euro Currency, especially with rates being cut and meetings happening. As I have stated in other Corners, the Euro is my canary in the coalmine. If the EU crisis worsens or becomes more uncertain, we will see weakness in the currency and the Euro, FXE could dip below 1.32 which would not be good for the currency or the markets. We are also seeing some strength in the Dollar, UUP, (due to the pullback of the Euro), which could be the contributor to the pullback in the Commodity space, DBC. I have not seen a big flux in Put/Call ratios, but volatility has been on the move and continues to impact my size and strategic deployment. In summary, the EU is still a headline minefield and I am trading accordingly.
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Market Recap

Stock market averages slumped across Europe and America Thursday after a key EU summit failed to produce a highly-anticipated "bazooka" to address the European Debt Crisis. While officials pledged three years of liquidity to European banks, they failed to indicate any plans to take other steps – like buy bonds. Stocks moved broadly lower on the announcement across the Eurozone, with a 2.5 percent loss in France's CAC 40 pacing the decline. In the US, the domestic economic calendar included some good news on the labor front after jobless claims fell to 381,000 last week, down from 404,000 the previous period and below expectations of 395,000. However, the focus remains on EU summit, which continues Friday as well. The Dow Jones Industrial Average has lost 150 points and the tech-heavy NASDAQ gave up 33. CBOE Volatility Index (.VIX) gained 1.67 to 30.34. Overall options volume is running about the typical levels, with 3.8 million calls and 3.5 million puts traded through 12:30pm ET.

This Morning's Bullish Trading

Large options blocks traded in Walgreen (WAG) today. Shares of the drugstore chain lost 27 cents to $34.24 and one strategist sold 15,000 January 31 calls on WAG at $4 and bought 15,000 January 28 puts at 29 cents. On the surface, the trade appears to be a bearish combination, or a Jan 28 – 31 risk-reversal on the stock. However, the position was tied to 1.5 million shares at $34.18. Therefore, it's really a "collar" strategy, in which the investor bought stock, sold calls, and bought puts. The position is similar to a covered call, but with a downside put bought as a hedge. Since the calls are already in-the-money, it's not necessarily a bullish play on the stock, but a bet that WAG will hold above $31 through the expiration. If so, the calls will be assigned at $31 per share. At that point, the profit is $31, minus the initial cost of the position (34.18 + .29 [for the put] – 4 [for the call]) or 31 – 30.47, which equates to 53 cents per every collar. Of course, the position can also be adjusted or closed out at any time prior to the expiration as well.

Pan American Silver (PAAS) shares slipped 23 cents to $24.24 after silver lost $1.07 to $31.56 an ounce. Options volume in PAAS so far today include 4,570 calls and 190 puts. The top trade is a 2000-lot of December 24 calls, bought for 95 cents per contract to open a new position. 2,300 now traded. Jan 25 calls on the stock are busy as well, with 1,375 traded. Yesterday, the Jan 34 and 35 calls on PAAS saw increasing interest. It's not clear what is driving the heightened call activity in the stock, as there have been no recent headlines on the company. Call buying might be "bottom fishing" after a 41.1 percent year-to-date decline in the share price.

This Morning's Bearish Trading

The top options trades so far today are in the SPDR Financials (XLF). The ETF, which holds shares of all the financial-related names from the S&P 500, is down 44 cents to $12.90 and a 65,000-contract block of January 15 calls was sold on the ETF at 11 cents per contract. It's not necessarily a bearish play, but is possibly a closing trade on diminishing hopes for a move beyond $15 (+16.3%) in shares through the January expiration (43 days). December 13, December 14, and January 14 calls on XLF are seeing high volume and trading predominantly on the bid as well. Overall trading is active, with 213,000 calls and 127,000 puts traded in the product so far.

A bearish trade surfaces in Bank of America (BAC) options Thursday. Shares are down 23 cents to $5.66 and one strategist bought 20,000 January 5 puts on the stock at 27 cents and sold 20,000 January 4 puts at 8 cents. The BAC Jan 5 – 4 put spread, for a 19-cent net debit, is a bearish play. Excluding transaction costs, the downside breakeven at expiration is at $4.81 and about 15 percent below current levels. Prior to today, the stock had been performing well and was up 17.1 percent from the 52-week low of $5.03 set on 11/29. Today's spread trade is possibly a bet that shares will revisit and fall below those lows through the January expiration, which is in 43 days.

Implied Volatility Mover

Implied volatility in the options on Itau Unibanco Holding (ITUB) is moving higher today. Shares of the Sao Paulo-based money center bank are off 44 cents to $18.49 after Brazil's Bovespa Index gave up 2.6 percent Thursday. Options on ITUB are seeing brisk trading. 4,565 calls and 7,000 puts traded so far, which is about 4X the typical volume for midday action. January 17 puts are the most actives. 2,500 traded. Jan2013 25 calls, 20 puts, 22 calls, 15 puts and 17.5 puts are seeing interest as well. Meanwhile, implied volatility in options on the stock is moving up 9 percent to 44 amid the heavy trading in ITUB Thursday.

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