Cusick's Corner

Nice move into the Midday by the equities, S&Ps+10. The market has now retraced Monday's drop but as I noted last night, I am attributing some of this action to early, end of the month window dressing by fund managers. Volatility continues to come out of the market but there are names with events on tap, i.e. earnings, so volatility has not come out of the market in whole. Here's one market that is still under pressure -- precious metals, GLD, and then the miners, GDX/GDXJ, which have specifically shown a bounce in implied volatility, GDXJ volatility +~10%. As an FYI for those readers who are in the Orland Park, Illinois area -- I will be doing an in person seminar on volatility strategies tonight, just e-mail us at education@optionsxpress.com for details. See you After Hours.

Market Recap

Stock market averages are holding gains with help from economic data and steady trading across Eurozone equity markets Wednesday. A report out before the opening bell showed Durable Goods up 1.1 percent in May and .6 percent better-than-expected. Later, Pending Homes Sales were up 5.9 percent for May and much better than the .5 percent increase that was expected. Meanwhile, Italy's MIB Index gained 2.5 percent and helped pace an advance across Eurozone equity markets ahead of a two-day summit among EU finance officials Thursday and Friday. Crude oil is up 60 cents to $80 per barrel, but off session highs of on the heels of weekly inventory data. Gold and Treasury bonds are little changed Wednesday. But the Dow Jones Industrial Average has added 82 points and the tech-heavy NASDAQ gained 22. Overall options volumes are light again today, with 2.3 million calls and 2.3 million puts traded across all the exchanges through 11:30am ET.

This Morning's Bullish Trading

Schlumberger (SLB) adds $1.54 to $61.21 Wednesday morning after suffering a five-day 11.1 percent losing skid. Options on the oil driller are busy. 40,000 calls and 25,000 puts so far. One spread trade is driving much of the volume, after an investor sold 15,000 August 55 puts on SLB at $1.24, bought 10,000 August 60 calls on the stock for $3.81 and sold 15,000 August 65 calls at $1.55. All three blocks traded on the CBOE and a source confirms on the exchange floor confirms that puts were sold to buy the 2X3 call ratio spread. The position appears to be a new one because volume exceeds open interest in all three contracts. If so, the spread seems to express a view that the stock will hold above $55 through the August expiration and possibly rally towards $65 per share. If not, and shares fall below the strike of the put, the strategist will be asked to buy (have put) the stock at $55 if the position is left open through the expiration. There is also additional risk to the upside because not all of the higher strike calls, which were sold, are covered by the lower strikes (that were bought). The best case scenario is a move to $65 per share at the August expiration. At that point, the 55 puts and 65 calls expire worthless, while the 60 calls are worth $5 per contract. Of course, the position can be closed out or adjusted at any time prior to the expiration.

Call options on AK Steel (AKS) are busy today. Shares of the steelmaker are up 38 cents to $5.67 and total options volume on the stock so far is 690 puts and almost 12,000 calls. July 6s, which are 6 percent out-of-the-money and expiring in 23 days, are the most actives in AK Steel. Volume is approaching 8,000 contracts. July 5 and September 7 calls are the next most actives. There's not news on the stock. Some investors are possibly anticipating a rebound in AKS after the three-month 35 percent slide in the shares. Rather than taking a position in shares outright today, however, call buyers are possibly taking positions in options contracts that give the right to buy (or call) the stock for a set price (strike) for a predetermined period of time (expiration date).

This Morning's Bearish Trading

The two largest options trades on a relatively slow day are in the SPDR Financials (XLF). Shares, which represent ownership in all of the financial-related names from the S&P 500, are up 16 cents to $14.27 and the top trades in the product are a September 12 – 13 put spread for 18 cents, 29000X. The investor bought 29,000 Sept 13 puts on XLF for 35 cents and sold 29,000 Sept 12 puts at 17 cents. If so, the put spread appears to be a short-term bearish play on the financials, or maybe a hedge, with a maximum profit if XLF falls to $12 or less through the September expiration.

Citrix Systems (CTXS), the virtualization software company, is up $1.11 to $80.91 and heading higher on relatively light volume of 680,000 shares. By way of comparison, typical volume through midday is about 890,000. However, options volume is running 7X the expected levels. 7,775 puts and 1,350 calls traded on the stock so far. August 80 puts are the most actives. 3,200 traded. July 80 and August 82.5 puts are the next most actives. It's not clear what is driving the pessimistic trading. Some investors might be buying puts to help hedge recent gains in the stock. CTXS is 14.3 percent since June 1.

Implied Volatility Mover

Implied volatility in the options on Lincare Holdings (LNCR) is up sharply today. The stock is rallying $5.05 to $30.31 on surging volume of almost 10 million shares on a Financial Times article suggesting Germany's Linde might make a bid for the company. Options on the stock are heavily traded as well. 16,000 calls and 2,000 puts so far. Meanwhile, implied volatility in LNCR options jumped 72 percent to 60.

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