Market is Challenging the Downtrend 06-02-2010

Cusick’s Corner
The market is challenging the downtrend, but it has been on light volume. Watch the resistance level of 1087 on the ESM10 – can be broken and challenge a downtrend line that has not been broken in the last 5 trading sessions. If there can be a late day breakout through this trendline, we could possibly see a stronger upside short-term push. An interesting trade surfaced in the Emerging Markets ETF, EEM, a strategist seems to have purchased the July 35 puts and sold the December 37 puts for a credit of $2.67 25,000 times. This is commonly called a diagonal spread, where the strategist would profit on the overall position if the stock is above $35, plus in the short-term could profit if the stock took a violent, very short-term drop. This is an option strategy that could take advantage of a potentially violent pull back in the short-term while also generating income if the market makes a longer-term move to the upside. One other note, if you sell puts you are making a statement that you want to own the stock. See you After Hours.

Stocks opened modestly higher and the early advance gathered momentum with help from better than expected pending home sales data. After a 113-point decline Tuesday, the Dow Jones Industrial Average opened steady despite another round of losses in overseas markets. JP Morgan (JPM), which was upgraded to Buy at UBS, helped lift the Dow in early action. Then, at 10:00 ET, the industrial average popped to session highs after data showed Pending Home sales up 6 percent in April, which was better than the 4.3 percent increase that economists were expecting. March numbers were revised up to 7.1 percent from 5.3 percent. With little other news to guide the market action, the Dow has been able to hold on to most of the gains and is up 107 points midday. The NASDAQ is up more than 30. The CBOE Volatility Index (.VIX) is down 3.85 to 31.69 and near session lows.

Bullish
MEMC (WFR), the St. Peters, MO silicon wafer manufacturer, is up 50 cents to $11.08 and calls are seeing very brisk trading on renewed takeover speculation. It’s unsubstantiated, but short-term speculators appear to be reacting to the chatter. June 12 calls are the day’s most actives. 8,792 contracts traded so far. June 9, 10 and 13 calls are busy as well.

Commercial Metals (CMC) shares jumped $1.11 to $15.97 and options are very actively traded Wednesday. Most of the volume is in the June calls. The 17.5s, which already have 15.5K in open interest, are the most actives. 2,696 traded through midday. Another 1,296 June 16s changed hands, vs. 3,120 in open interest. While some of the activity might be offsetting, the relative strength in the stock and the increasing options action is noteworthy, as there’s no obvious company specific news to explain the action.

Bearish
Altria (MO) is up 17 cents to $20.29 and noteworthy activity is being seen in the June puts. Specifically, a block of 4,500 June 20 puts traded at the 42-cent Ask price. Meanwhile, a block of 4,500 June 18 puts traded on the 5-cent bid. The action has the hallmarks of a bearish June 20 – 18 bear put spread at a 37-cent net debit. It’s a short-term play with a maximum profit of $1.63 (excluding commissions) if MO falls to $18 or less by the June expiration (16 days.)

Transocean (RIG) is down another $2.07 to $47.97 and options action remains brisk amid worries about the impact from the out-of-control oil spill caused by Transocean’s Deepwater Horizon rig. Shares are now off 43.5 percent since April 28 and options trading on the oil driller remains very active with another 64,000 calls and 56,000 puts traded through midday Wednesday.

Unusual Volume Movers
SPDR Metals and Mining ETF (XME) options volume is running 3.5X the usual, with 63,000 contracts traded and put volume accounting for about 97 percent of the activity.

Genworth Financial (GNW) options activity is running 5X the usual, with 62,000 contracts traded and put volume representing 97 percent of the volume.

ArvinMeritor (ARM) options volume is running 7X the usual, with 27,000 traded and put volume representing 59 percent of the activity.

Canadian Solar (CSIQ), Dish Networks (DISH), and Shanda Interactive (SNDA) also have unusual volume.

Implied Volatility Movers
Amgen (AMGN) implied volatility is easing as shares rally on news the FDA has approved the biotechnology company’s osteoporosis treatment, Prolia. Shares are up $4.45 to $55.20 and options volume is 3.5X the recent average daily. More than 28K calls and 19K puts traded so far. Implied volatility is down about 16 percent to 31.5.