Bid Still Participating 09-28-2010

Cusick's Corner
The market again has a wide range today. Overnight my thesis was proved that when the market has a quick and hard shakeout, e-mini Dec S&P down to 1130 on potential EU debt fears in Greece and Ireland, the bid picks up and the market bounces right back to 1140 in an hour. So the bid is still participating, but what is troubling is that key markets are decoupling, there's one pair in particular -- Bonds (TNX) and Equities (SPX). These markets have been correlated since May, meaning that when rates go up, the market moved up and vice versa, which held true until the last two weeks. This pair is worth having on your watchlist, plus keep an eye on the comparison chart. See you After Hours.

Stocks battled back from early losses and are trading mixed midday Tuesday. The tone of trading was cautious early ahead of consumer confidence numbers and after data showed the Case-Shilller 20-City Price Index up 3.18 percent in July, which was a bit less than the 3.3 percent that economists had expected. Then, a round of selling surfaced at 10:00 ET after data showed the latest Consumer Confidence index falling to 48.5 in September, down from 53.2 last month and much worse than the 53.0 reading that economists had expected. However, after sliding on the data, the sell-off was short-lived and stocks are now trading mixed. The Dow Jones Industrial Average is up 25 points, but the NASDAQ is fractionally lower. The CBOE Volatility Index (.VIX) added .21 to 22.75 through midday. Options volume is a bit more active and seems more defensive than Monday, with about 3.3 million calls and 3.1 million puts traded by 12:15 ET.

Bullish
Walgreens (WAG) shares are up $3.38 to $33.73 and options volume is 14X the average daily after the retailer reported a quarterly profit of 49 cents per share, which was a nickel better than Street estimates. Shares are rallying on the news and options volume includes 96,000 puts and 38,000 calls. The top trade was part of a spread, in which the strategist sold the October 31 – 27 put spread at a dime, 34,000X. That is, they sold 34,000 October 31 puts at 14 cents and bought 34,000 October 27 puts at 4 cents, perhaps rolling up a position in short puts after today's better than expected earnings.

Dryships (DRYS) is seeing a second day of heavy trading. Shares added 34 cents to $4.47 Monday after Morgan Stanley upgraded shares of the dry bulk shipping company to Equal Weight from Under Weight. DRYS is up another 41 cents to $4.88 today after winning a $135 million contract. About 39,000 calls have traded in the name so far. October 4, October 5 and November 5 calls are the day's most actives.

Bearish
AMR options are actively traded for a second day. Shares added 7 cents to $6.45 yesterday after news of a merger between Southwest Airlines and Air Tran sparked a rally in the airline sector. However, AMR is down 9 cents to $6.36 today and November 7 calls are seeing heavy trading. More than 30,000 contracts traded and, with 54 percent trading on the bid and 44 percent mid-market, it appears that call sellers were dominating the action. Some investors might be liquidating positions from yesterday, as the AMR November 7 call saw heavy buying interest on the merger news Monday.

ConocoPhillips (COP) added 73 cents to $56.99 amid strength in the energy sector after crude oil gained 28 cents to $76.80 a barrel. Meanwhile, in COP options, about 18,000 puts and 6,800 calls have traded through midday. October 55 puts are the most actives. 12,215 traded and about 75 percent traded at the ask-price. Meanwhile, implied volatility is up 2 percent to 24, as it appears that some investors are buying these out-of-the-money puts on concerns about a possible drop in ConocoPhillips' share price.

Unusual Volume Movers
Monsanto (MON) options volume is running 3.5X the usual, with 70,000 contracts traded and put volume accounting for about 58 percent of the activity.

Walgreens (WAG) options activity is running 15X the usual, with 138,000 contracts traded and put volume representing 70 percent of the volume.
Dryships (DRYS) options volume is 4X the typical levels, with 45,000 contracts traded and call volume accounting for 98 percent of the activity.

Increasing volume is also being seen in AMR, Pulte Homes (PHM), and Adobe (ADBE).

Implied Volatility Movers
Monsanto (MON) implied volatility is elevated amid active trading Tuesday. Shares are down 7.6 percent to $49.04 and options volume is 3.5X the average daily, with 32,000 calls and 42,000 puts traded so far. Implied volatility jumped 13 percent to 43.5. The weakness in the stock and higher implied volatility comes after an Australian chemical company Nufarm reported weak results.