It was a nice day in the markets with all averages holding a large part of their gains into the After Hours. This is also only the second time that the market has closed above the downtrend established in April and the DOW, NASDAQ, & SPX all finished today over the 50 Moving Average, potentially turning this mid-term moving average from resistance to support. There is resistance at key levels, 1098 R1/1105 R2 on the SPX, these need to be broken if we are going to see upside push. It is also worth watching the Copper markets (JJC: 42.40 0.00 0.00%) that hit its highest price since its decline started in April (and before the decline in the equities market), signaling that the economic recovery underway was not as strong as estimated. This move in Copper and this latest up trend in the commodity space (and the market in general) should be viewed as a positive seasonal trend and could become quickly challenged if either lose demand, especially Copper in the fall. One note, watch for the stress test results from EU banks, this could add some potential volatility. See you Midday.
Stocks finished broadly higher with help from strong earnings and good economic news from overseas Thursday. Stock index futures had tallied substantial gains overnight after data in Europe showed better-than-expected orders for industrial goods as well as an uptick in the purchasing managers index for June. In the US, investors were able to look beyond a disappointing reading from the latest weekly jobless claims (+37K vs. +18K consensus) and focus on a round of mostly positive earnings reports, including Caterpillar (CAT: 68.00 0.00 0.00%), UPS (UPS: 63.150.00 0.00%), and Qualcomm (QCOM: 39.11 0.00 0.00%). The early advance gathered additional momentum after a report on existing home sales showed a decline to an annualized rate of 5.37 million for June, from 5.66 million in May and much better than the 5.09 million economists had expected. From there, trading was mostly range bound until the Dow Jones Industrial Average finished the session with a 200-point gain. The NASDAQ added 59.
Bullish Flow
Bank of America (BAC: 13.66 0.00 0.00%) saw noteworthy spread trading in morning action Thursday. Shares were up 50 cents to $13.86 at the time and one or more strategists were initiating bullish 1X2 ratio spreads in the Jan 15 - 17.5 call options. For example, a block of 5,000 January 15 calls at $1.10 coincided with a block of 10,000 January 17.5 calls at 40 cents. This 1X2, at a 30-cent debit, traded in large blocks totaling more than 20,000 contracts (x40000 of the 17.5s) Thursday morning. It’s a bullish play, as it makes its best profits if shares rally to $17.5 by the January options expiration.
Bank of America (BAC: 13.66 0.00 0.00%) saw noteworthy spread trading in morning action Thursday. Shares were up 50 cents to $13.86 at the time and one or more strategists were initiating bullish 1X2 ratio spreads in the Jan 15 - 17.5 call options. For example, a block of 5,000 January 15 calls at $1.10 coincided with a block of 10,000 January 17.5 calls at 40 cents. This 1X2, at a 30-cent debit, traded in large blocks totaling more than 20,000 contracts (x40000 of the 17.5s) Thursday morning. It’s a bullish play, as it makes its best profits if shares rally to $17.5 by the January options expiration.
Bullish order flow was also seen in Netflix (NFLX: 103.56 0.00 0.00%), Chiquita Brands (CQB: 12.70 0.00 0.00%), and Blackstone Group (BX: 10.74 0.00 0.00%).
Bearish Flow
Medco Health Solutions (MHS: 49.00 0.00 0.00%) shares sank $4.33 to $49.00 after reporting better-than-expected earnings for the second quarter, but then offering more cautious guidance for the full year. MHS sank on the news and options volume rose to 13X the recent average daily. The options order flow wasn’t entirely bearish, however. 15,000 calls and 8,960 puts traded. While sellers of August 50 and 55 calls were seen midday, the top trade was a block of 1,256 October 45 calls at $5.55 and was possibly a seller initiating a covered call or buy-write strategy.
Medco Health Solutions (MHS: 49.00 0.00 0.00%) shares sank $4.33 to $49.00 after reporting better-than-expected earnings for the second quarter, but then offering more cautious guidance for the full year. MHS sank on the news and options volume rose to 13X the recent average daily. The options order flow wasn’t entirely bearish, however. 15,000 calls and 8,960 puts traded. While sellers of August 50 and 55 calls were seen midday, the top trade was a block of 1,256 October 45 calls at $5.55 and was possibly a seller initiating a covered call or buy-write strategy.
Bearish flow also picked up in Express Scripts (ESRX: 42.12 0.00 0.00%), Duke Energy (DUK: 17.10 0.00 0.00%) and Lam Research (LRCX: 41.55 0.00 0.00%).
Index Trading
The CBOE Volatility Index (.VIX) lost 1.01 to 24.63 as the S&P 500 rallied for a 24-point gain Thursday. Options action picked up noticeably in the volatility index after 223,000 puts and 188,000 calls traded on the session, which is about 2.5X the recent average daily volume. Apparent buyers of August 22.5 and 25 puts led the action. For example, a block of 40,000 August 25 puts traded at $1.50 in morning action. A separate block of 35,000 August 22.5 puts traded at the 55-cent Asking price a bit earlier. These large put purchases might be to hedge positions in VIX futures or might be outright bets that volatility will begin falling from current levels. VIX August options expire in 26 days.
The CBOE Volatility Index (.VIX) lost 1.01 to 24.63 as the S&P 500 rallied for a 24-point gain Thursday. Options action picked up noticeably in the volatility index after 223,000 puts and 188,000 calls traded on the session, which is about 2.5X the recent average daily volume. Apparent buyers of August 22.5 and 25 puts led the action. For example, a block of 40,000 August 25 puts traded at $1.50 in morning action. A separate block of 35,000 August 22.5 puts traded at the 55-cent Asking price a bit earlier. These large put purchases might be to hedge positions in VIX futures or might be outright bets that volatility will begin falling from current levels. VIX August options expire in 26 days.
ETF Trading
The Select Sector Financials (XLF: 14.45 0.00 0.00%) added 41 cents to $14.45 and an impressive covered call was initiated in the fund in morning trading Thursday. An investor bought 3 million shares of the XLF at $14.33 and sold 30,000 December 15 calls at 76 cents. This buy-write is a bullish play. By selling the calls, the strategist lowers the cost basis of owning shares to $13.57 (plus commissions). $13.57 becomes the breakeven through the expiration. The upside is to $15, or 10.5 percent. If shares rally beyond that level by the December expiration, the calls will be assigned and the shares called away at that price. Of course, the strategist can close the position through an offsetting transaction any time prior to the expiration or being assigned. However, once assigned, it is too late to close the calls.
The Select Sector Financials (XLF: 14.45 0.00 0.00%) added 41 cents to $14.45 and an impressive covered call was initiated in the fund in morning trading Thursday. An investor bought 3 million shares of the XLF at $14.33 and sold 30,000 December 15 calls at 76 cents. This buy-write is a bullish play. By selling the calls, the strategist lowers the cost basis of owning shares to $13.57 (plus commissions). $13.57 becomes the breakeven through the expiration. The upside is to $15, or 10.5 percent. If shares rally beyond that level by the December expiration, the calls will be assigned and the shares called away at that price. Of course, the strategist can close the position through an offsetting transaction any time prior to the expiration or being assigned. However, once assigned, it is too late to close the calls.
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