Chris Tyler, Optionetics.com
February 18, 2011

Another less-surprising move by China and the latest stab at profit-taking is met by buyers and sellers...well, of puts at least. As of 11:05 ET the SP-500 (SPY) is scratching its way through the unchanged level by 0.05% after doing a bit more of the "buying the pullback thingamajiggy" on heavier-than-normal, expiration-related nipping and tucking.

China’s latest less-and-less surprising "surprise" hike of its reserve requirement held bulls captive for roughly the time it takes for the ringing of the Opening Bell to fall silent. With the latest evidence this week of prices in China still a bit too hot courtesy of CPI and PPI data, central bankers announced a 50bps increase.

Pre-market sentiment on the Street saw stateside bulls flirting with the idea that surely this latest monetary tightening would be the one that would break the bull’s economic back and stymie global growth prospects. Heading into Friday’s session though, those prior concerns have seemingly been swept under the carpet.

Intraday, it appears investors have allowed themselves to re-focus on overall stronger economic data of late and continuing to indulge in self-serving “buy the dip” momentum. In those often intertwined markets of influence and largely responsible for investors quickly improved game face, the CBOE Volatility Index ($VIX) is off -2.50% near 16%.

Short-term extreme readings of too much optimism in the VIX aren’t an issue at this juncture with the 10SMA squarely locked at cash levels. Nominally speaking though and after a double in just less than two years for the broader market; the matter of over-confidence bears a bit more weight for consideration.

Friday’s slightly pressured action in the VIX might also be appreciated as being self-induced. When investor optimism is confident, which it currently is, Fridays often find traders resorting to riskier market positioning in front of the weekend. The hope or bet is, is Monday will provide fresh bullish ammo to begin the week; which historically speaking, has been shown by statisticians to hold true.

This particular Friday also has the added bonus for bulls in that it precedes the US President’s Day holiday on Monday. With one less day to effectively trade and sentiment more optimistic than not, trader action in the VIX reflects the consensus view that other global markets will behave while US traders enjoy a day away from the office. With tensions flaring once more in the Middle East, what could possibly go wrong? Nothing, apparently.

In those other often intertwined markets of notice, risk appetite is also apparent in the US Dollar (UUP) as shares trade down -0.40% to fresh weekly lows. At the same time, buoyed by pressure in the Greenback, the threat of inflation and / or maybe geopolitical unrest, COMEX Gold (GLD) is up 0.45% and continuing to make prior bearish patterns reinvent themselves into missed buying opportunities.

On the corporate front, strong top and bottom-line beats and optimistic forecasts from Yingli Green Energy (YGE) and SunPower (SPWRA) helped the solar arena flare higher this morning but are seeing some profit-taking off out-the-gate highs.

Intraday, shares of SPWRA are up 6% but well-removed from gains in excess of 13% early on in the session. A research note from boutique broker Wunderlich which maintained its “Hold” rating on shares and suggests flat growth for the solar group in 2011 after an increase of 125% in 2010 appears to be the chief catalyst for Friday’s intraday fizzle.

Finally and in those sometimes accurate heat-seeking option markets of notice, not-too-long ago, former No. 1 ranked IBD 100 component JinkoSolar (JKS) is seeing much heavier-than-normal activity. More than 10,000 contracts traded compared to a daily average of about 1,100, but roughly 80% of the action appears to be a roll of 4,000 contracts.

Equal volume of 4,000 contracts in the deep Feb 25 call, which sports similar open interest, and the in-the-money but less deep March 27 call suggests an “up and out” roll has taken place. The initiating party could be pushing out a long call position, but with earnings scheduled for February 28, my best guesstimate is the trader is selling calls as a hedge against long stock.

This combo or “buy write” position is widely touted as “conservative”, particularly when things go according to plan. However, that same spread can also be pointed out as being the equivalent of selling a put—and a strategy deemed “risky” when conditions fail to match expectations.

Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
Optionetics.com ~ Your Options Education Site