Rolls for Breakfast 11-10-2010

Cusick's Corner
Yesterday's pullback felt more like profit taking than a negative reaction to any data release or headline. The Claims data for both new and existing dropped, resulting in an early morning pullback that gave some strategists the opportunity to reposition. One way to reposition in the options world is the “roll” -- a strategist rolls out of a pre-existing position into a new one. One notable roll happened in JPM today -- a strategist apparently sold call positions at the 35 and 36 strikes and rolled up, buying the 37 call strike. This strategist may have been taking profits from an earlier call purchase and is now using some of those profits to continue their bullish sentiment by rolling up and buying a less expensive call option. In this instance the strategist is mitigating capital risk while continuing to hold a bullish exposure in the stock. A trader's job is first and foremost to protect principle and mitigate capital risk whenever possible, and this latest shakeout gave them that opportunity. Check out the “roll” function in the oX positions screen. Also take advantage of being able to vote on some new ideas we are looking to add to the platform through the WISH LIST -- your vote counts. See you After Hours.

Stocks have battled back from morning losses and are trading mixed midday Wednesday. The table was set for weakness on Wall Street after European markets and the euro drifted lower on concerns about euro-zone debt problems. The euro dipped below 1.37 against the buck for the first time in three weeks. The weakness abroad seemed to overshadow the day's domestic news, which included a better-than-expected reading on jobless claims. Filings for benefits fell by 24,000 to 325,000 last week. Economists were looking for a smaller decline, of about 10,000. However, although stocks slipped at the open, the morning decline was orderly and trading has stabilized at midday. The Dow Jones Industrial Average is down 33 points and 59 points off session lows. The NASDAQ is flat. The CBOE Volatility Index (.VIX) added .14 to 19.22. Meanwhile, trading in the options market remains active, with about 4.7 million calls and 3.8 million puts traded through 11:30 ET.

Bullish
Large blocks of call options traded in Citigroup (C) Wednesday morning. Shares have added a dime to $4.40 and morning trades included a block of 50,000 January 4.5 calls at 21 cents per contract. It coincided with a block of 50,000 Citi March 4.5 calls at 32 cents. It looks like a roll, or closing out a massive position in January 4.5 calls and opening a new one in March. It's traded more than once, as volume in both contracts now exceeds 100,000. The play might also be an opening time or calendar spread, i.e. a bet that shares will hold below $4.5 through the January expiration and then rally from that point forward.

Merck (MRK) is flat at $35.05 and options volume is running more than double the usual, with about 30,000 calls and 12,000 puts traded on the pharmaceutical maker through midday. November 35, 36 and 37 calls are the most actives. Looks like some short-term speculators are active in the name. Bloomberg is reporting that the company is gearing up to present results from a trial of a drug used to fight heart disease by raising good cholesterol in the blood. Today's call traders in Merck might be initiating position in anticipation of the news.

Bearish
Powershares QQQ (QQQQ) is an exchange-traded fund that holds the NASDAQ 100 Index (NDX) components. NDX, in turn, is an index of the top 100 non-financial stocks that trade on the NASDAQ. The QQQQ, or Qs, have added 8 cents to $53.53 today and a noteworthy trade in the fund is a March 53 – 52 put ratio spread, in which an investor apparently sold 30,000 November 52 puts at 22 cents and bought 10,000 March 53 puts at $2.62. This looks like a position adjustment, or a roll out of November and into a smaller position in March, but up 1 strike price. It might be designed to hedge a portfolio of NASDAQ-listed stocks.

Potash (POT) has added 24 cents to $141.61 and a noteworthy options trade in the fertilizer company Wednesday morning is a November 130 – 135 – 140 put butterfly spread at 90 cents, 4500X. In this spread, it appears that an investor bought 4,500 November 130 puts and bought 4,500 November 140 puts for the wings of the fly. They also sold 9,000 November 135 puts for the body. If so, they paid a net debit of 90 cents per fly and are looking for shares to fall towards $135 by the November expiration in 9 days. However, it might also be a closing trade.

Unusual Volume Movers
IShares MSCI EAFA Index (EAFA) options volume is running 2.5X the usual, with 92,000 contracts traded and call volume accounting for 62 percent of the activity, according to data from website WhatsTrading.com.

Valero (VLO) options activity is running 5X the usual, with 60,000 contracts traded and call volume representing 97 percent of the volume.

Merck (MRK) options volume is 2X the typical levels, with 42,000 contracts traded and call volume accounting for 70 percent of the activity.

Increasing volume is also being seen in Human Genome Sciences (HGSI), Dean Foods (DF), and National Oilwell (NOV).

Implied Volatility Movers
Cisco Systems (CSCO) options are actively traded and implied volatility is moving up ahead of earnings, due after the close of trading today. Shares lost 4 cents to $24.30 and options volume includes 96,000 calls and 36,000 puts. November 25 and the Weekly (11/12) 24 calls are the most actives. Implied volatility is up 7 percent to 30 ahead of the results.