Stocks And Options Recap: Rally On Capitol Hill

Today (Tuesday) was encouraging, but was really nothing more than an impressive short covering rally. Chairman Bernanke voiced in his testimony that the recession could tail-off by end of year and we could see the sour economy turn around in mid 2010. But he also wanted to stress, and I totally agree, that the current challenges are still strong and that these stresses will exist for the foreseeable future. I do not know about you but this just spells Volatility. While the VIX (^VIX), the volatility index that tracks the S&P 500 (^GSPC), contracted today the shorts are waiting in the wings. We will watch the follow through tomorrow. President Obama speaks tonight so let’s see what he says. Numbers tomorrow (Wednesday) that could impact trading, 10:00 ET Bernanke Monetary Policy Report, 10:00 ET Existing Home Sales for Jan, 10:30 ET Crude Inventories. See you Midday.

After Hours

Stocks bounced back from recent losses after the S&P 500 Index held a key support level and found midday strength with help from short covering. The S&P 500 hit a low of 942.37 Monday and came within striking distance of its November 21 intra-day bottom of 741.02. After holding steady early Tuesday, a rally ensued around Noon Central Time and major averages were holding strong gains into the final hour. Short covering was likely fueling some of the rally, as the day’s news offered no real catalyst for a major mover higher in the stock market averages. Economic data released before the start of trading showed home prices suffering a historic drop, falling more than 18 percent during the fourth quarter. A separate report released an hour later showed consumer sentiment falling to record lows last month. Attention then turned to Fed Chairman Bernanke who gave testimony to the Senate Banking Committee. The head of the Federal Reserve rehashed concerns about the deteriorating economy along with the mounting pressures on financial institutions. Nothing new there. Meanwhile, Citi (C) helped the Dow Jones Industrial Average (^DJI) on reports a deal with the Treasury Department might be reached Wednesday or Thursday. In addition to Citi, 28 of 30 Dow stocks finished the day with gains and only Microsoft (MSFT) moved lower. The Dow gained 234 points. The CBOE Volatility Index plummeted 7.77 to 44.85. Trading in the options market remains active, with approximately 6.9 million calls and 6.4 million calls traded Monday.

Bullish

Hartford Financial Services Group (HIG) had a good day. Shares of the embattled insurance company gained $1.33 to $8.01. The top options trade of the day hit early with shares at $6.67. At that time, an investor bought 17K Jan 2011 calls at the $7.5 strike for $3.90. It was a straight call buy, according to an exchange-floor contact. The call option is now bid for $5 and 26,654 contracts traded on the day, compared to only 206 contracts of open interest. Bullish trading was also seen in El Paso (EP), Yahoo (YHOO), and Schlumberger (SLB).

Bearish

Best Buy (BBY) hit a low of $26.84 early in the day, but battled back to close up 30 cents to $27.88. The early weakness was possibly related to rival Radioshack’s (RSH) disappointing earnings. RSH lost $2.64 to $8.81. In the options market, puts on Best Buy saw active trading. 26,000 contracts traded, or about four times the number of calls. March 20 and 25 puts saw the most volume, as it appeared that some investors were positioning for possible downside in BBY shares. Bearish trading was also seen in Autonation (AN), Headwaters (HW), and US Steel (X). The PHLX Gold and Silver Mining Index (^XAU) saw a bit more volume than usual Tuesday. 4,025 contracts traded, or about double the usual. The index, which tracks the share price action of a basket of gold and silver mining companies, fell 9.09 to 119.24 after gold lost $30 to $965 an ounce. June 122.5, March 102.5, and March 97.5 puts were the most actives, as some investors took positions in XAU puts–possibly on concerns about further downside in the mining group. Active trading was also seen in the S&P 500 Index, the CBOE Volatility Index, and the Russell 2000 Index (^RUT). Approximately 432,000 puts and 390,000 calls traded across all index products Tuesday.

ETF Trading

The Select Sector Financials (XLF) finished up 87 cents to $8.05 and the June 10/12/14 call butterfly spread was active for a second day. To be specific, a strategist sold 10,000 June 12 calls for 16 cents while buying 5,000 June 10 calls for 46 cents and buying 5,000 June 14 calls for 6 cents. The activity has all the characteristics of a substantial call butterfly, where the strategist sold 10000 of the 12s and bought half as many (5000) 10s and 5000 of the 14s. If so, this strategist has a very bullish view on the exchange-traded fund because it would take a substantial move higher between now and June options expiration for the spread to generate a profit. Elsewhere in the ETF market, SPDR Trust (SPY), the Powershares QQQ (QQQQ), and the Proshares Ultra Financials (UYG) had among the more actively traded contracts. Approximately 2.0 million puts and 2.4 million calls traded across all exchange traded funds.

Subscribe by RSS Subscribe by Email