Waiting on the Fed 09-21-2010

Cusick's Corner
While I am waiting for the Fed, there is one macroeconomic issue and one short-term technical level that I am watching into today's announcement. The macro issue is that China's key stock index .SSEC, has been completely divergent to any move in the S&Ps. If China continues to drag down and dips below 2600 level which is a key support, it would be hard to make the case for a continuing S&P rally and not have the bulls potentially challenged. I am monitoring the S&P technical level of 1132. The Fed announcement is out at 2:15 ET, so make sure that you have planned accordingly. See you After Hours.

Major averages are modestly lower in a cautious trading ahead of the Federal Reserve Open Market Committee [FOMC] rate announcement. Economic news was in focus early Tuesday after data showed Housing Starts improving to an annual rate of 598K in August, up from 541K in July and better than the 550K that economists were expecting. However, Building Permits, a better gauge of future activity, increased by a more modest 10K to 569K (vs. 560K consensus). After a 146-point rally Monday, the Dow Jones Industrial Average opened modestly lower on the data and now it is wait-and-see into the FOMC policy statement at 2:15 ET. While officials aren't expected to change rates, the post-meeting statement will be scrutinized for clues regarding future policy action. The Dow Jones Industrial Average is down 15 points and the NASDAQ lost 6.4 ahead of the statement. The CBOE Volatility Index (.VIX) is up .50 to 22.00. Options volume is respectable, with about 3.9 million calls and 3.3 million puts traded by 12:30 ET.

Bullish
A large block of call options traded on the SPDR Homebuilder Trust (XHB) on the heels of today's better-than-expected housing numbers. XHB holds some of the leading companies from the homebuilding and housing industries and is up 14 cents to $15.71. One investor bought a block of 50,000 January 2012 calls at $2.56 per contract. This player is paying a whopping $12.8 million in premium (plus commissions) and seems to have a very bullish view on the builders for the rest of this year and into 2011. Rather than buying shares, they're buying longer-term calls as a way to play XHB.

Plains Exploration and Production (PXP) shares are off 79 cents to $25.77 and call options on the Houston-based drilling company saw brisk trading Tuesday morning on takeover talk. It's unsubstantiated chatter, but seems to have triggered a reaction in the options, as about 33,000 calls and 6,435 puts have traded on PXP through midday. Short-term speculators are active in the October 28 and 29 calls.

Bearish
DR Horton (DHI) shares moved up to $11.34 early Tuesday on stronger-than-expected housing data. However, shares are now flat at $11.05 and one investor seems to be looking for a possible decline in the share price through the rest of 2010, as 30,000 January 10 puts were bought at 73 cents per contract Tuesday morning. 40,000 puts and 835 calls now traded on the homebuilder.

SPDR S&P Retail ETF (XRT) lost 51 cents to $40.60 and it looks like one investor expects additional weakness in the exchange-traded fund in the months ahead. The November 40 – 36 put spread was apparently bought at 92 cents, 12500X in morning trading Tuesday. That is, it looks like this investor bought 12,500 of the November 40 puts at $1.44 and sold 12,500 of the November 36 puts at 52 cents, which creates a bearish spread with a max pay-off if shares of the fund, which holds a basket of retailers, fall to $36 or less by the November expiration.

Unusual Volume Movers
Phillip Morris (PM) options volume is running 16X the usual, with 208,000 contracts traded and call volume accounting for about 97 percent of the activity.

Vivus Pharmaceuticals (VVUS) options activity is running 6.5X the usual, with 42,000 contracts traded and call volume representing 83 percent of the volume.
General Mills (GIS) options volume is 2.5X the typical levels, with 32,000 contracts traded and call volume accounting for 66 percent of the activity.

Increasing volume is also being seen in AMR, Gannett (GCI), and Boston Scientific (BSX).

Implied Volatility Movers
Gannett (GCI) shares are down and implied volatility higher after UBS initiated the stock with a Neutral rating Tuesday morning. GCI is off 3.4 percent to $13.04 and options volume is 3X the average daily. 8535 puts and 635 calls traded in the name so far. Implied volatility rose 6 percent to 53.