Today's session had a tight range (I know that I sound like a broken record) but we did have volatility and a sense of tension, VIX +.43%. One sector that has the potential to move on the open tomorrow could be the Agricultural sector. The move down in the buck has been a decent upside catalyst but the USDA monthly world supply numbers are out at 8:30am ET and segments like fertilizers, farm machinery, and seed names could all have some potentially volatile trading post the number. I will also be watching the Crude Inventory numbers right after the open at 10:30am ET. Crude Oil has been just banging up against the 200-Day Moving Average. See you Midday.
Stock market averages were higher midday and finished with modest gains Tuesday. Strength across European equity markets helped set the table for steady action on Wall Street. Germany's DAX gained 1.3 percent and helped pace the advance across the Eurozone after a German court ruled that a decision on whether to ratify the European Stability Mechanism will take place Wednesday. Some lawmakers had tried to delay or postpone the decision. In the US, the only economic stat of the day showed the Trade Balance running at a $42 billion deficit in July, from $41.9 billion and not as wide as the $44 billion that was expected. With no other economic data and very little corporate news, market averages were higher along with their European counterparts through midday, but then action turned aimless in the afternoon session. At the closing bell, the Dow Jones Industrial Average was 61 points higher. The NASDAQ lost most of its midday gains and finished up .5 points.
Options on Microsoft (MSFT) were actively traded. Shares of the software giant added 7 cents to $30.79 and were among 24 Dow stocks to hold gains Tuesday. Share volume was about 23 million and well below the recent daily average of 31.7 million. Yet, 161,000 options traded on Microsoft and that's about 50,000 more than normal. One large combination trade accounted for about 30 percent of the total volume in Microsoft, after one investor sold 24,000 December 28 puts on the stock at 53 cents and bought 24,000 December 33 calls for 54 cents. The Dec 28 - 33 risk-reversal, for a penny, appears to be a new position (because volume exceeds open interest in both contracts). If so, the trade represents a bullish play on the stock through mid-December. The investor is probably a willing buyer of the stock for $28 per share (about 9 percent below current levels) and is writing the puts, but is also taking a position in upside calls for exposure if the stock moves higher.
Bullish trading was also seen in Cheniere Energy (LNG), International Game Technology (IGT), and Radian (RDN).
Kraft Foods (KFT) lost 44 cents to $39.77 and was among 6 Dow stocks to move lower today. Options volume on the food company was 2.5X the daily average, being driven by a bearish risk-reversal in the October term. The investor sold 10,000 October 38 calls on KFT at $1.90 and bought 10,000 October 34 puts for a nickel. The Oct 34 - 38 risk-reversal, for $1.85, doesn't seem to be a bearish play, however. It was tied to a block of 1 million shares for $39.74. This "collar" trade has a similar risk profile as writing an in-the-money covered call, but the investor is also paying a nickel per contract for downside puts as a form of insurance. That is, the put, which provides the right to sell the stock at the strike (34) through the expiration (12/22/2012), will hedge the position if there is a dramatic move lower in the short-term. Writing upside calls will also limit the potential profits because if the contract is in-the-money at expiration, the shares will be sold or called away. It's possible that the trade is a play on Kraft's news Friday that it is recommending to its Board that the company pay a $2 annual dividend.
Bearish trading was also seen in Jabil Circuits (JBL), KeyCorp (KEY), and Monster Worldwide (MWW).
Options on the CBOE Volatility Index (.VIX) were actively traded for a second day. 494,000 calls and 98,000 puts traded in the VIX pit Monday. The index fell to a morning low of 15.46 today, but then moved higher in the afternoon session and added .11 to 16.39 on the day. Meanwhile, another 830,000 calls and 393,000 puts traded on the index. The 1.2 million contracts dwarfed the volume in the S&P 500 Index (.SPX) pit. 270,000 calls and 485,000 puts traded on the S&P 500 today. VIX tracks the expected or implied volatility priced into S&P 500 index options and today is one of the rare instances when volume on the volatility product was significantly greater than the cash stock index (from which the volatility index is derived). December 24 calls were the most actives on VIX. 132,000 contracts changed hands. November 18 puts, September 20 puts, and October 26 calls on VIX also saw volume in excess of 100,000 contracts.
US Natural Gas Fund (UNG) was heating up Tuesday. The ETF, which is designed to track the price of the commodity through futures contracts, was up $1.15 to $20.15 in heavy trading of 22 million shares after natural gas prices edged up 19 cents to $3. UNG options were actively traded as well. 51,000 calls and 79,000 puts changed hands. The largest options trade in the fund printed late in the day when 12,000 Oct 17 puts traded on the 20-cent bid. The contract is 15.8 percent out-of-the-money and expiring in 38 days. More than 26,100 contracts traded on the day, as some players might have been liquidating positions in the downside puts on the view shares aren't likely to run out of fuel in the weeks ahead. Oct 16 puts, Oct 22 calls, and Oct 11 puts on UNG were actively traded Tuesday as well.
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