Chris Tyler, Optionetics.com
December 27, 2010
Rather hearty and thus far, well-rewarded risk appetite of late digests a surprise year end rate hike from China with modest profit-taking. As of 10:55 ET the SP-500 (SPY) is off -0.20% in slightly difficult-to-handle and “VIX’ing” price behavior.
In headline news (and that is singular by the way), over the weekend Chinese officials announced an earlier-than-anticipated second hike of 25 basis points to its benchmark lending rate in an effort to guard against an overheating economy. Overseas, the move pressured the likes of the Shanghai down about two percent on the session.
Stateside, despite the potential for increased volatility tied to sometimes slippery holiday conditions and more than a few early moans of how China’s action might impact its global and heavily-reliant trading partners; bulls have managed to pull up their bootstraps and keep profit-taking ultra constructive.
Some of Monday’s refusal to budge on the part of stateside bulls and the auto pilot programs doing their bidding is supported by the financials (XLF) once again. After a pause last Thursday on the heels of a solid two day, alpha-chasing year-ender push into the group by muscular financial types, the sector is demonstrating relative strength with its gains of 0.50%.
Orchestrating some of the sector’s strength, Dow components BofA (BAC), JP Morgan (JPM) and American Express (AXP) are taking three of the top four spots on the percentage leaders’ board with gains of 0.60% to 2.00%.
Also supporting the broad and influential sector, credit card issuers Visa (V) and MasterCard (MA) are up 2.00% to nearly 3.00%. With a dearth of headline catalysts, the action appears predicated on similar sympathy interest from bulls looking for the latest potential financial subgroup still positioned for bargain-hunting outperformance into the year-end.
In the top spot, shares of fellow and sometimes Anchor Banker AIG (AIG) are up more than 6.50% on fresh financing provisions. The company announced a $3.0B credit facility which will be available upon the closing of its recapitalization plan with the US Treasury.
Bulls in AIG and with the help of the stock’s near 15% short interest and five plus days-to-cover ratio appear to have found extra incentive from management which stated they “can see the finish line” with regards to its funding plans.
In AIG’s option markets, interest has strong more than 35,000 contracts changing hands and about three times its daily average. Call activity is eclipsing put trading by a two-to-one margin on heavy but nothing out of the ordinary volume in its surrounding money strikes.
Front month premium comprised of the December Weekly contract and the regular January options, as well as February contract, have all found a bid to two plus month highs.
The average ATM pricing is near 47% for all three trading months but a substantial “short stock” skew favoring higher put premiums exists. Premiums are mixed statistically with shares showing a rather loose range of values over the past couple months.
Elsewhere on this very wintery day for much of the US and Europe, some snowier headlines can be found in the land of China-based micro and small cappers. One time hotty, Gushan Energy (GU) has surged nearly 38% today on massive but let’s face it, more suspect than usual volume due to holiday-inspired trading conditions.
According to reports, a less-heralded news item out of China this morning is the country intends to exempt its biodiesel consumption tax which stands to benefit the company, a few daytraders and possibly shareholders.
Fellow “almost was” A-Power Energy (APWR) is tacking on about 12.50% on six times its average trade. The energy grid concern announced an EPC contract with Inner Mongolia Huolinhe Coal Trade Group for a 4x200 MW micro grid project.
In those often intertwined markets of notice, the price action has been mostly aligned with last week’s mostly non-stirring performance. In no particular order, the US Dollar (UUP), iShares Silver ETF (SLV), 20-Yr (TLT) and Black Gold (USO) are all flickering fractionally red and green lights of promise and little else as China’s slightly earlier-than-anticipated announcement gets digested without upsetting those risk appetites of late.
Finally and in those sometimes accurate heat-seeking option markets of notice, the CBOE Volatility Index ($VIX) is up a fairly strong 9% near 18%. The “18%” part, as well as prior pre-holiday pricing in of a quiet holiday period however, makes the reaction more of a “ho-hum” affair.
Nominally, 18% in the VIX is where price support of a couple months was broken a couple weeks back. As much, the move into this level could manifest itself into resistance.
With the “stretch” or differential between the spot and its 10SMA at about 6% though, this analyst is much less inclined to see selling premium as a good outright bet and despite other folks probably still inclined to play the optimistically opportunistic game of pricing in a quiet holiday which may or may not be upon us.
Senior Staff Writer & Options Strategist
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