Midday Update On Stocks And Options

Who believes anything out of Washington? Well, the market doesn’t. The rules change, the bailouts change, the initiatives change and what is not changing is that the market keeps going down. Now let’s cover the proposed stake in Citi in the midday update. That dirty word “Nationalization” comes up again, which only strengthened the shorts in this market. From a technical perspective, we have challenged and broken November lows, only exacerbating conditions for our already sour economic, negative market outlook. Our current domestic trend is now slipping into the large emerging parts of the world like China/Brazil. Here the impacts of their slowing trade, fizzling energy markets and challenges with unemployment, have opened an opportunity to potentially look at a bearish strategy, bear put spread, in one of these markets. The reason that I bring this to light is that we must remember that options are versatile and not only profitable whether the markets go up or down. The most challenging skill which one needs to get through these markets, is the ability to forecast and be disciplined enough to execute that forecast based on a well-balanced plan.

I look at these markets and I am bearish, took the time to build some strategies that fit that sentiment and created a disciplined risk and capital management exit strategy before I pushed that trade button. This is the process that we all need to follow when trading in this environment. We will build on this process this afternoon. See you in the After Hours.

Midday Update

Stocks have given back early gains and are back in the red despite moves higher in BofA (BAC) and Citi (C). Citi shares moved up early after the Wall Street Journal reported that the government intends on taking a 25 to 40 percent stake in the bank and that, in turn, helped ease some of the concerns about a complete government takeover. Similarly, BAC is seeing a modest bounce after CEO Ken Lewis said over the weekend that there is no reason the bank should be considered for nationalization. However, gains in those two stocks wasn’t enough to make up for losses in 23 other components of the Dow Jones Industrial Average (^DJI) and, as a result, the Dow is down 90 points midday. With no economic data until reports home prices and consumer confidence Tuesday morning, investors have little other news to work with. The bearish underlying tone continues. Crude oil gave back early gains and is trading down 12 cents to $39.90 a barrel. The NASDAQ (^IXIC) is down 30 points. The CBOE Volatility Index (^VIX) is making a run back above 50 and approximately 2.8 million puts and 3.3 million calls traded across the options exchanges by 11:00 Central Time.

Bullish Flow

Call volume picked up in the PHLX Bank Sector Index (^BKX) Monday morning. The index tracks the price action of two dozen banks and hit a high of 23.34 on news the government is taking a stake in Citigroup, but does not plan on a complete takeover. Diminishing fears of nationalization sparked early gains in the sector, but the BKX has since given it back and is trading up .07 to 21.77. In the options market, some traders are showing interest in March 25 calls. More than 9,100 traded, compared to open interest of 208. Looks like some investors were opening new positions; perhaps hoping the bank index might rebound from its five-month 76 percent decline before the March options expiration (25 days). Jetblue (JBLU) calls saw some interest Monday morning. Shares are up 7 cents to $4.32 and showing relative strength. In the options market, June 5 calls are the most actives. 3,585 traded, compared to open interest of 983. Morning trades included a three large blocks at the offer for 80 cents. Similar activity was seen in June calls on Delta Airlines (DAL).

Bearish Order Flow

Bearish trading continues in US Steel (X). Shares are down $2.38 to $22.42 and March 22.5 puts are the most actives. 15,500 traded and almost 70 percent traded ask-side of the bid-ask spread. With existing open interest of 2,976, the activity looks like opening put buys and seems to reflect concerns about the short-term outlook for the steelmaker. Occidental Petroleum (OXY) shares are down 95 cents to $49.11 and volume is picking up in March 45 puts. 5,540 contracts have traded, or about 7 times the existing open interest. In addition, with almost all (97 percent) of the day’s trading hitting ask-side of the bid-ask spread, it looked like some investors were buying puts and opening new put positions in these out-of-the-money options.

Unusual Volume (2x or greater average daily volume)

Dell Computer (DELL) options volume is running two times the usual. 58,000 contracts traded and call volume accounts for 82 percent of the activity. Options activity in Alliance Data (ADS) rose to eleven times the usual, with 40,000 contracts traded and put volume representing almost all of the activity. JC Penney (JCP) options activity rose to twice the usual. 29,000 contracts traded and put volume responsible for 92 percent of the day’s action. Increasing volume was also seen in Kraft (KFT), Humana (HUM), and BJ Wholesale (BJ).

Implied Volatility Movers

BofA implied volatility is back down to 205 and off the record highs of 255 late Friday on diminishing worries about nationalization. Shares are up 27 cents, or 7.1 percent, to $4.06. Implied volatility is also lower in Citi, Nova Chemicals (NCX), and Garmin (GRMN). Meanwhile, implied volatility is higher in Dell Computer, US Steel, and General Electric (GE).

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