OEX Put/Call Ratio Spiked in Morning 11-02-2010

Cusick's Corner
The market will be watching the early polls, but I do not anticipate much action before the final exit polls start rolling in tonight. One interesting sentiment piece, the OEX Put/Call ratio (OEX is an index at the CBOE that tracks the S&P 100) spiked to 1.44. This is interesting because the OEX is typically where larger institutional clients trade and early this morning there seemed to be an influx of put purchases. It has pulled back into the midday to .72, but it was an interesting move on the open, especially in front of some potentially bullish election results in the wings. See you After Hours.

Major averages are holding gains, but the underlying tone of trading remains somewhat cautious ahead of mid-term election results and a Fed meeting on interest rates. With no economic news to guide the morning action, some of the early focus was on a weakening dollar, which in turn helped lift crude oil and gold. Crude added $1.07 to $84.02 and gold gained $1 to $1,351.60 an ounce. Investor appetite for riskier assets is also driving gains in the Dow Jones Industrial Average, which added 75 points, and the NASDAQ, now up 21. However, uncertainty about results from the mid-term elections and the Fed's stimulus plans seems to be keeping the rally in check. The Federal Reserve will wrap up its meeting tomorrow afternoon and perhaps offer greater clarity about its efforts to stimulate economic activity. While the market is falling into wait-and-see mode, there seems to be optimism that neither the Fed nor the elections will hold any unpleasant surprises. Not only are stocks up, but the CBOE Volatility Index (.VIX) has eased .43 to 21.40. Options volume is respectable. 3.5 million calls and 2.5 million puts traded by 12:15 ET.

Bullish
Homebuilder Lennar (LEN) is up amid relative strength in the sector Tuesday morning. The SPDR Homebuilder ETF (XHB) is up .42 to 15.94. Lennar is leading the way. Shares are up $1.07 to $15.93 and options volume is 3.5X the average daily, with about 27,000 calls and 4,550 puts traded on the ticker. The action is mostly across November, December and January 16 and 17 calls. The relative strength in the stock and the increased call activity appears to be related to speculation of a possibly buyout of the homebuilder. It's unsubstantiated, but seems to be the catalyst for the unusual action.

ADP shares have added five cents to $44.77 and options volume is at 6X the average daily, with one investor apparently buying the November 44 – December 46 call spread at 70 cents, 5000X. This looks like a rolling of a position opened on September 30 when 5000 November 44 calls traded at the 44-cent ask price. The stock is up 6.5 percent since then and the calls are in-the-money. The investor is exiting the position and opening a new bullish trade in the December 46 calls.

Bearish
Retailer Kohl's (KSS) is off 7 cents to $51.57 and options volume is double the usual levels, with 3,710 puts and 2,610 calls trade in the name so far. November 50 puts are the most actives. 2,780 traded so far. November 55 and January 60 calls are seeing interest as well. It looks like players are taking positions in anticipation of volatility in the shares. It might be a play on monthly same store sales results, normally released on the first Thursday of the new month.

Sara Lee (SLE) was the subject of a sizeable put spread Tuesday morning. Shares added 39 cents to $14.64 and one investor apparently sells 10,000 November 14 puts to buy 10,000 December 14 puts. This time spread looks like a new position and one that does well if shares hold above $14 through November (two and half weeks) and then fall from that point forward. Earnings will be a factor. The company is due to report on November 10 and before the November expiration.

Unusual Volume Movers
ADM options volume is running 5X the usual, with 35,000 contracts traded and call volume accounting for 52 percent of the activity, according to data from website WhatsTrading.com.

Crown Castle (CCI) options activity is running 12X the usual, with 31,000 contracts traded and call volume representing 95 percent of the volume.

TEVA options volume is 2.5X the typical levels, with 26,000 contracts traded and call volume accounting for 57 percent of the activity.

Increasing volume is also being seen in Rackspace (RAX), Electronic Arts (ERTS), and Vulcan Materials (VMC).

Implied Volatility Movers
Rackspace (RAX) has seen a day of heavy trading and increasing implied volatility. Shares rallied at the open after CEO Michael Dell said his company is looking to buy a company in the cloud computing space, which raised speculation that DELL might bid for RAX. However, RAX came off its best levels after DELL announced plans to buy privately held Boomi instead. Nevertheless, trading in Rackspace remains brisk. 16,000 calls and 7,835 puts traded. Shares are now up 75 cents to $26.11 and implied volatility up 14 percent to 66.