Bailouts Boost Bulls 05-10-2010

Cusick’s Corner
Bailout! Bailout! Who needs a Bailout? It’s official -- no one is allowed to fail. With this new “optimism” in the market, the short-term trader is leaning on this bullish enthusiasm. While it is a nice boost into the midday, there is the potential of setting up some short-term squeeze. This could lead to more short-term highs, but could result in a more formidable top. As I have been mentioning over the past few weeks, the only way to mitigate time and volatility risk is to spread. Determine your direction and volatility sentiments, then refer to the Educate section or use a tool like the Strategy Scan to assist in generating some ideas. I will bring up some general ideas every afternoon over the coming weeks. See you After Hours.

The major averages surged Monday morning after EU leaders agreed to a $1 trillion bailout of European debt markets. Meanwhile, the European Central Bank said it would buy back eurozone national bonds and the US Federal Reserve agreed to provide billions in overseas loans. The efforts helped bolster the euro and European equity markets. US markets followed along when the opening bell rang on Wall Street. Beyond that, there isn’t much other news to guide the action. The economic calendar is light until later this week and there have been no earnings reports of broad market significance. The Dow Jones Industrial Average rallied more than 420 points. The NASDAQ gained 105. Options activity remains very brisk, with about 5.14 million calls and 5.1 million puts traded at 12:00 ET.

Bullish
Homebuilder KB Homes (KBH) saw increasing options activity early Monday. Shares are up $1.32 to $17.62 and options volume is 2X the average daily, with 9,350 calls and 1,730 puts traded so far. The top trade is a block of 7,800 May 17 calls that traded at 85 cents on International Securities Exchange [ISE], which is an opening customer buyer, according to ISEE sentiment data. 8,690 contracts have now traded, compared to 1,115 in open interest. The call buying appears to be speculative activity in anticipation for today’s rally to continue over the next 11 days, and up through the May options expiration (11 days).

Qualcomm (QCOM) shares are up $1 to $37.50 and some investors are showing interest in October 33 put options. More than 10,000 traded. The biggest of the day is a block of 8,418 that traded at $1.78 when the bid-ask spread was $1.75 to $1.85. This appears to be a put writer opening a new position and possibly willing to buy the stock if QCOM falls to $33 per share by the October options expiration.

Bearish
The credit rating agencies are under fire after Moody’s (MCO) said it received a Wells Notice from the Securities Exchange Commission [SEC] and could potentially face enforcement action. The news adds to a list of woes facing the company. Shares are down another $1.71 to $21.64 today and off 27 percent since April 15. Options are seeing brisk trading as well. About 12,000 puts and 2,750 calls traded so far. Most has been in smaller lots. The top trade is 160 June 20 puts at the $1.05 asking price.

The other credit rating agency, McGraw Hills (MHP), parent company of Standard & Poor’s, is seeing active trading as well. Shares are down $2 to $28.28 and options volume is 3X the average daily, with 3,680 puts and 1,490 calls on the tape so far. June and August 25 puts are the most actives, with some investors buying premium and bracing for additional losses in the weeks ahead. Shares have already fallen 22.6 percent since April 15.

Unusual Volume Movers
Comcast (CMCSA) options volume is running 4X the usual, with 53,000 contracts traded and put activity representing about 52 percent of the activity.

SPDR KBW Bank Index ETF (KBE) options activity is running 6X the usual, with 29,000 contracts traded and put volume representing about 99 percent of the volume.

Broadcom (BRCM) options volume is running 2X the usual, with 23,000 traded and put volume representing 63 percent of the activity.

There is also unusual volume in Psychiatric Solutions (PSYS), On Semiconductor (ONNN), and Express Scripts (ESRX).

Implied Volatility Movers
The CBOE Volatility Index (.VIX) closed above the 40 level Friday for the first time since April of last year. Today, however, VIX has plummeted 12.35 points to 28.60 after news of an EU bailout helped send the S&P 500 Index (.SPX) 45 points higher. If the volatility index closes at these levels, it will present the 5th largest point drop in the volatility index’s history.