Focus Shifts Back to Domestic Issues 05-26-2010

Cusick’s Corner
After the initial pop on the open, the market is holding onto these gains and there’s just whippy action into the Midday. As I noted yesterday, there’s irrational behavior in the market -- the VIX popped 50% in a few days, which even with all the monumental moves that we have had in the last year, it’s almost unmatched in that time-frame. This was also when a potential entry opportunity presented itself, once you could recognize the situation. Currently there’s more of a short-term trading mentality, playing the long side, which seems to be the less frustrating position in this particular market cycle. Any long side position should definitely be positioned with monies using strategies where the potential profits and losses are defined. Watch for resistance to build at the 1090/1100 level on the S&P. See you After Hours.

Stocks are broadly higher with help from economic data Wednesday. With steady trading throughout most of Asia and Europe, the focus finally shifted back to some domestic news. A report on Durable Goods, released pre-market, showed an increase of 2.9 percent for April, which was significantly better than the 1.5 percent increase that economists had expected. Meanwhile, a separate report, released thirty minutes into trading, showed New Home Sales up to an annualized rate of 504K in April, from 439K in March and much better than the 425K that economists had predicted. The data helped ease some of the recent concerns about the European Debt Crisis and potential impact on the global economy. The Dow Jones Industrial Average is up 60 points and the NASDAQ added 22.5. The CBOE Volatility Index (.VIX) is off 2.78 to 31.83 midday. Trading in the options market is running about normal levels, with about 5.6 million calls and 4.8 million puts traded at 12:30 ET.

Bullish
AMR, the parent of American Airlines, is up 51 cents to $7.65 amid strength in the sector Wednesday. US Airways (LCC) is leading the group, up 11 percent after JP Morgan upgraded shares to Overweight. Meanwhile, AMR options are seeing heavy trading. About 28,000 calls and 4,900 puts changed hands through midday. June 8 calls are the most actives. 15,500 traded and, with 70 percent of the volume trading ask-side of the bid-ask spread, it appears that speculative buyers are driving most of the action. July 8 and June 7 calls are seeing interest as well.

Prudential (PRU) shares gained $1.07 to $56.75 and options order flow seems bullish, with about 12,000 calls and 2,050 puts traded so far. July 60 – 65 calls are seeing the bulk of the flow and the action seems to include some spread trading. For example, one investor apparently bought 4,340 June 60s at $1.15 and sold 4,340 June 65 calls at 21 cents. This bullish spread, at a 94-cent debit, is an aggressive play because there are only three and half weeks remaining until the June expiration.

Bearish
Petrohawk (HK), which saw heavy selling of June call options Tuesday, is seeing interest in its puts today. Shares are up 73 cents to $18.32 and the top trade of the day is a block of 8,800 January 2012 $5 puts at the 30-cent asking price. This appears to be a type of “disaster insurance” because these puts are $13.32 out-of-the-money and it would take a substantial move lower in shares of the Houston, TX oil and gas company for the position to yield a profit at the January 2012 options expiration.

Cheesecake Factory (CAKE) is up 32 cents to $25.72 and some options traders are munching on CAKE puts Wednesday. Total options volume is running 4X the average daily, with 5,630 puts and 970 calls traded so far. The top trade is 2000 October 20 puts at $1 even, which might be a seller. Beyond that, most of the action has been in smaller lots of October 20s traded at the asking price. 5,280 contracts now traded vs. 1,034 in existing open interest.

Unusual Volume Movers
Etrade Financial (ETFC) options volume is running13X the usual, with 259,000 contracts traded and call volume accounting for about half of the activity.

Select Sector Technology Fund (XLK) options activity is running 5X the usual, with 171,000 contracts traded and call volume representing 78 percent of the volume.

Nokia (NOK) options volume is running 3X the usual, with 48,000 traded and call volume representing 91 percent of the activity.

Vertex (VRTX), Rambus (RMBS), and Mirant (MIR) also had unusual volume.

Implied Volatility Movers
Citi (C) implied volatility is easing after Oppenheimer analysts upgraded the stock, citing valuations and earnings prospects through 2012. Shares are up 19 cents to $3.97 and 834,000 call options have already traded on the bank. Meanwhile, implied volatility is down another 14 percent to 49 and now significantly below last week’s highs around 70.