I Love This Game 07-07-2010

Cusick’s Corner
The market held its ground, something the shorts have conceded at this stage. The day ended with the SPX breaking its second point of resistance 1053. For this to have strength, any pullback here needs to garner more support and get more of the sideline money involved to strengthen the bid as we see more revised upside earnings guidance for the fall. If we continue to run without a larger shakeout, the rally will be more suspect. For sports fans, especially Cav fans, there was an interesting trade in Madison Square Garden (MSG) where a July 20 – 22.5 strangle was apparently purchased for $1.10 2000 times. King James in NYC, if the Knicks do not get him this hurts their organization but the option strategist could potentially win either way -- I love this game! See you Midday.

Stocks finished broadly higher Wednesday. The focus is beginning to shift to earnings with Alcoa (AA) unofficially kicking off the second quarter reporting season next week. For that reason, many of the financial names rallied around an upbeat earnings forecast from State Street (STT). Meanwhile, a number of industrial, technology, and commodity-related names, which had been pummeled in recent weeks, saw solid gains amid bargain hunting and aggressive short covering. At the end of the day, all Dow thirty were higher and the industrial average had added 275 points. The NASDAQ rallied for a 65.5-point gain.

Bullish Flow
Southwest Airlines (LUV) rallied 66 cents to $11.29 after releasing its June load factor numbers Wednesday morning. In the options market, volume rose to 13X normal led by a large seller of August 10 puts. This investor sold a block of 10,000 contracts at 25 cents each. The contract expires in 45 days and if shares hold above $10, the puts will expire worthless and the strategist will keep the premium. On the other hand, if shares fall below $10 and the puts are not closed before the August expiration, this writer of 10,000 August $10 calls will be assigned and asked to buy 1 million shares at $10 each.

Bullish order flow was also seen in Illumina (ILMN), Madison Square Garden (MSG), and KB Homes (KBH).

Bearish Flow
Qualcomm (QCOM) sees an impressive trade in afternoon action Wednesday. Shares of the chipmaker rallied along with other names in the sector and finished up 73 cents to $33.38. In the options market, one player took advantage of the strength to initiate a bearish risk-reversal in the October 28 puts and October 36 calls. They apparently bought 20,400 October 28 puts at 82 cents per contract and sold 20,400 October 36 calls at $1.04. This position was tied to a block of 1.02 million shares and seems to a bearish play on the chipmaker.

Bearish flow also picked up in FTI Consulting (FCN), United Airlines (UAUA), and Mosaic (MOS).

Index Trading
The PHLX Gold and Silver Mining Index (.XAU) gained 4.72 to 173.09 after gold prices (August) gained $2.9 to $1198 an ounce. XAU tracks the price action of a basket of gold and silver mining company shares. In the options market, volume in the index rose to 5X the typical levels, led by apparent sellers of September 165 straddles. 2600 traded total, including a block of 520 at $22 even in afternoon action. Looks like one or more investors were selling September 165 puts and 165 calls; possibly looking for the index to gravitate towards that level through the September expiration.

ETF Trading
Select Sector Financials (XLF) jumped 60 cents to $14.20 after the sector rallied around a better-than-expected earnings forecast from State Street Wednesday. In the options market, the tone of trading remained cautious with 322,000 puts and 134,000 calls traded on the exchange-traded fund. While some of the activity is likely closing of bearish trades or unwinding of hedges, one of the top trades was a buyer of 26,500 January 16 –12 put spreads at $1.96. If it’s an opening play (it might be a closing spread or a roll), this is bearish spread because it makes its best profits if shares fall to $12 by the January expiration. Meanwhile, implied volatility in the fund fell 10 percent to 34, which reflects the diminishing investor anxiety levels about the outlook for the financial sector. XLF is an exchange-traded fund that holds all of the financial-related names from the S&P 500.