US Markets Follow Europe's Gains 06-09-2010

Cusick’s Corner
Yesterday’s bullish divergence was extended today and buyers appear to be coming in from the sidelines. The short-term strength of the Euro has been a decent barometer of strength in the Equity markets. Major European Bourses closed higher and the Euro is also up. US stocks followed Europe’s move and all major averages are solidly higher today. Due to the market’s strength, the VIX is down 9%, trading under 31. Fed’s Beige Book comes out today at 2:00pm ET. I am also reviewing Fed Chairman Bernanke’s testimony before the House Budget Committee (see Summary). See you After Hours.

Stocks are broadly higher following a day of gains in Europe’s equity markets, upbeat comments from Fed Chairman Ben Bernanke, and a rally in crude oil Wednesday. Stock index futures notched higher before the start of trading in New York after the euro gained .0044 to 1.2015 against the buck and stocks moved broadly higher across the Eurozone. Germany’s DAX paced the advance with a 2.1 percent rally. In the US, the focus turned to testimony from Chairman Bernanke in morning action. The Fed head updated his outlook on economic conditions; noting that problems in Europe’s debt market might serve as a modest drag on the economy, but the recovery continues. Meanwhile, the oil drillers are rallying after crude oil gained $2.67 to $74.66 a barrel and. The PHLX Oil Service Index (.OSX) is up 6.44 to 170. The Dow Jones Industrial Average jumped 113 points and the NASDAQ added 31. The CBOE Volatility Index (.VIX) lost 3.26 to 30.44. Options volume is running about the typical levels, with 3.7 million calls and 3.3 million puts traded at 12:00 ET.

Bullish
Anadarko Petroleum (APC) is up amid rallying crude oil prices and talk that the moratorium on deepwater drilling could be lifted early. APC has been pummeled in recent weeks, as the driller was one of the partners in the Deepwater Horizon rig that sank in the Gulf of Mexico. Wednesday, however, shares are up 75 cents to $43.55 and noteworthy spread trades surfaced early, with one or more investors apparently buying November 47.5 calls and selling November 57.5 calls. The call spread, which reaches its max profits if APC rallies beyond $57.5 by November, has traded more than 10000X.

Citigroup (C) June 4 call is the second most actively traded equity options contract Wednesday (see PFE color below). Shares of the bank are up 17 cents to $3.89 and more than 70,000 contracts changed hands through midday. The top trade is a block of 7,500 June 4 calls on the 7 cent bid. The trade might be a closing seller as the contract is 11 cents out-of-the-money and has more than 1 million contracts of open interest. June options also expire at the end of next week.

Bearish
Pfizer (PFE) is flat at $14.55 per share and noteworthy action is being seen in the PFE September 16 calls. More than 100,000 contracts traded, in what appears to be opening call writing, as most have traded on the 34-cent bid price and existing open interest is 36,700. This premium writer might be selling calls against shares as part of a covered call play or simply writing calls on the view that shares will hold below $16 through the September expiration. Either way, by selling the contract, they are making the pledge to sell shares at $16 (100 shares per call option) from now through the September options expiration.

First Solar (FSLR) is up $2.28 to $106.66 per share and attempting to bounce from a 30 percent slide suffered since late April. In the options market, noteworthy trading activity is being seen in the July 80 puts, which are 25 percent out-of-the-money. The action included an apparent buyer of 2,382 at the $1.31 asking price, which might be to hedge a position in shares should the volatility continue. More than 3,000 contracts traded through midday.

Unusual Volume Movers
BP options volume is running 2X the usual, with 134,000 contracts traded and put volume accounting for about 57 percent of the activity.

Ambac Financial (ABK) options activity is running 3X the usual, with 55,000 contracts traded and put volume representing 59 percent of the volume.

Tellabs (TLAB) options volume is running 5X the usual, with 33,000 traded and put volume representing 94 percent of the activity.

Baxter (BAX), MEMC (WFR), and NRG also have unusual volume.

Implied Volatility Movers
Rambus (RMBS) implied volatility is easing after shares fell on talk of a re-hearing in the case between the chipmaker and Micron/Hynix. Shares are down $1.66 to $20.24 and options volume is 3X the average daily, with 23,000 calls and 30,000 puts traded so far. There seems to be less uncertainty now that a decision has apparently been made. Consequently, implied volatility is down 39 percent to 55 on the news.