Stocks & Options Wrap-Up: Showing Resilience

The market showed resilience into the close, with strong volume and some solid short-term bullish technicals. The S&P 500 (^GSPC) broke below the 800 level but in convincing fashion they finished above that critical 800 level in the last 20 minutes of the trading day. This bounce into the close was meaningful for the simple fact that in the recent past moves to the downside at this stage of a trading session were met with continuation to the downside - but not today.

The equity markets were not the only sectors to claw their way back from the lows.

Crude (CLK9), after the release of the weekly DOE report, finished well off its lows of 51.86 to close at 52.79, even though for the second week we saw a build in inventories. The metals also fought back from early pullbacks, Gold (GLD) being the best performer finishing up on the day. With the bond auctions being weak, 5yr auction, and the Geithner dollar and currency comments, the market was set-up for some interesting moves. In the end the market settled above the 809 level on the S&Ps which really muted the potential of greater downside at this immediate juncture.

I would watch the Initial Claims 8:30 ET for the week of 3/21.

After Hours

The major averages overcame midday selling pressure to close mostly higher Wednesday. The Dow Jones Industrial Average (^DJI) opened the day on solid footing after data released pre-market showed surprise improvement in orders for durable goods.

According to the Commerce Department, orders rose 3.4 percent last month. Economists had predicted a 2.5 percent decline. The rally was extended in morning action after home sales numbers also surprised to the upside. Sales increased to an annualized rate of 337,000 in February, which was better than the 322,000 the month before and also better than economist forecasts of 300,000. Stocks moved mostly higher until about 1:00 central time when news of a poor auction of 5-year Treasury notes sent bond prices sliding. Stocks fell along with bonds and the Dow Jones Industrial Average was down more than 100 points heading into the final hour of trading.

However, another reversal unfolded in the final thirty minutes and, by the end of the day, the Dow Jones Industrial Average was up 90 points. The CBOE Volatility Index (^VIX) slipped .78 to 42.15. Approximately 8.2 million calls and 6.3 million puts traded across the exchanges.

Bullish

Rambus (RMBS) saw a day of heavy trading amid takeover chatter Wednesday. Shares gained .17 to close at $9.99 and total options volume rose to twice the normal levels. 23,000 calls traded, compared to 2,420 puts. Trading was heavy in April calls with strike prices ranging from 10 to 17.5, as some investors appeared to buy premium on hopes for higher prices before the April expiration (23 days). Bullish trading was also seen in MEMC Electronics (WFR), Apple Computer (AAPL), and Genworth Financial (GNW).

Bearish

Owens Illinois (OI) gained 88 cents to $14.49 and 11,000 calls traded on the day, or about 4X (396 percent) the normal volume. Investors were aggressively selling premium as the stock moved higher. August 17.5 and August 20 calls were among the most actives, as call writers were possibly taking short positions on the view that a significant move above $17.5 strike is unlikely. The top trade of the day was 7000 April 12.5 calls for $2.50, which is probably a closing trade after the stock’s nearly 50 percent rally since March 9. Bearish trading also surfaced in Netflix (NFLX), Kohl’s (KSS), and Health Care (HCN).

Index Trading

The CBOE Volatility Index (.VIX) slipped .68 to 42.25 and one strategist appears to be looking for the index to stay within a range over the next few months. Around 1:00 central time, 10000 July 45 puts, 5000 July 35 puts, and 5000 July 55 puts traded simultaneously. Exchange floor sources tell us the trade was part of a butterfly spread bought for $2.35. If so, this strategist is looking for VIX to stay in a range and possibly move towards 45 through the July options expiration. Outside of that, the S&P 500, the mini-Nasdaq 100 Index (^MNX), and the Dow Jones Industrial Index had among the more actively traded contracts. Approximately 420,000 puts and 327,000 calls traded across all index products.

ETF Trading

The iShares Xinhua China Fund (FXI) gained .13 to $28.64 and April 28 and 31 calls were actively traded Wednesday. Roughly 15000 and 30000 contracts traded, respectively. Most of the activity appears to be the result of a substantial ratio spread, where the strategist bought the 28s and sold the 31s. If so, they have a bullish view on the Chinese markets through the April options expiration as this spread yields its best profits if FXI settles for $41 per share at expiration. Beyond that, the Select Sector Financials (XLF), the SPDR Trust (SPY), and the Select Sector Industrials (XLI) had among the most actively-traded securities. Trading volume picked up, with 2.3 million puts and 2.75 million calls traded across all exchange traded funds.

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