Market Waffling 07-27-2010

Cusick’s Corner
The market has been in quite a range, coming off its overnight highs into the Midday and just waffling around break even. The market at this stage, short-term, is in a bullish consolidation and most traders are waiting to see if another push to the upside is going to potentially shake out these shorts that have been stubborn enough to stay in the market. The volume is low today and unless there is some sort of CNBC moment today, we could expect this consolidation to continue into the After Hours.

Stocks are trading mixed in quiet fashion Tuesday. DuPont (DD) is up 3.3 percent and helping the Dow Jones Industrial Average stay above water after the chemicals company reported earnings that topped expectations and also raised its forecast for the future. The stock market averages were also helped higher early Tuesday by news that some of Europe’s largest banks, like Deutsche Bank (DB) and UBS, reported strong earnings. However, the early gains were kept in check after the Conference Board’s Consumer Confidence Index fell more than expected in July. It fell to 50.4, down from 54.3 in June and below economist estimates of 51. Investors seemed to shrug off the data, but the tone of trading then turned more cautious midday. The Dow Jones Industrial Average is up 15 points, but the tech-heavy NASDAQ is down 10. The CBOE Volatility Index (.VIX) edged up .49 to 23.22. Trading in the options market is active, with about 4 million calls and 3.2 million puts traded through 11:30 ET.

Bullish
Sprint Nextel (S) calls have been busy ahead of its earnings. 81,000 contracts traded yesterday, including 61,000 August 5 calls. Open interest in the contract increased by nearly 20,000 and is now the largest position in Sprint at 110,970. Today, another 26,000 August 5 calls changed hands. While some of the action is probably closing positions, the surge in activity in Sprint Nextel call options is noteworthy. The stock is down 16 cents to $4.89 ahead of the earnings results due Wednesday morning. Some investors appear to be accumulating bullish positions in the August 5 calls as a cheap way to play the stock heading into the news.

Two of the largest equity option trades Tuesday are in Xerox (XRX). Shares are up two pennies to $9.55 and a strategist apparently initiated a bullish risk-reversal in the September 9 puts and September 10 calls, selling 15,000 September 9 puts at 25 cents to buy 15,000 September 10 calls at 35 cents. The position, at a 10-cent net debit, was actually tied to 1 million Xerox shares and therefore not a straight bullish bet. In fact, it makes substantial profits if shares settle at $9 at the September expiration and the puts expire worthless. It will also make money if XRX sees a substantial spike higher.

Bearish
Genzyme (GENZ) has been rallying in recent days amid media reports that Sanofi-Aventis (SNY) is interested in acquiring the biotech company. Shares are up some 25 percent since the story broke late last week. GENZ opened higher again Tuesday, but are down 18 cents to $67.20 midday Tuesday. Meanwhile, one options strategist seems to have a cautious view on the stock. In morning trading, a bearish three-way spread was initiated when an investor sold 7000 October 75 calls at $1.60 to buy the January 50 – 65 put spread at $3.70, 7000X. A shareholder looking to protect recent gains might have initiated this bearish position.

Juniper Networks (JNPR) shares lost 79 cents to $28.06 through midday Tuesday and, in the options market, a noteworthy spread surfaced in the networking company after an investor apparently bought 5,400 October 28 puts at $1.43 and sold 5,400 October 25 puts at 54 cents. This spread, at an 89-cent net debit, has traded nearly 6000X and appears to be a bearish bet, as it makes its best profits if shares fall to $25 or less by the October expiration.

Unusual Volume Movers
Pfizer (PFE) options volume is running 4X the usual, with 275,000 contracts traded and call volume accounting for about 96 percent of the activity.

Genzyme (GENZ) options activity is running 5X the usual, with 58,000 contracts traded and call volume representing 65 percent of the volume.
TEVA options volume is running 2.5X the usual, with 46,000 traded and put volume representing 55 percent of the activity.

Unusual volume is also being seen in Xerox (XRX), Tellabs (TLAB), and the Semiconductor HOLDRS (SMH).

Implied Volatility Movers
MGM implied volatility is beginning to move amid active trading ahead of next week’s (August 3) earnings report. Shares of the casino operator are up 36 cents to $11.32 and 62,000 options have traded in the name, or 4X the normal for midday. The activity includes 43,000 calls and 18,000 puts. Meanwhile, implied volatility is up 3 percent to 70.5 today and up nearly 12 percent so far this week.