Sovereign Debt Back on Front Burner 11-18-2010

Cusick's Corner
The Irish meet with the ECB and IMF today and the market feels that this is enough of a catalyst to retrace yesterday's pullback. The bulls appear to have a heightened sense of continued headline risk, especially if the Irish walk away from the ECB and IMF. This puts the sovereign debt crisis back on the front burner, along with the inflation battle in China, turning the Dollar into the safety trade as we witnessed yesterday. At the very least, volatility is here to stay for the near term. From a strategic perspective, spread trading is a more prudent way to mitigate that volatility risk. See you After Hours.

Stocks are broadly higher Thursday on upbeat economic data and hopes for a bailout in Ireland. The table was set for morning gains on Wall Street after European stocks moved broadly higher on optimism that EU, IMF and Irish leaders will reach an agreement about loans to help Ireland avoid defaulting on its debt. Britain, one of the largest holders of Irish debt, also pledged aid to Ireland yesterday. Meanwhile, the domestic news included a report that showed weekly jobless claims up just 2,000 in the period ended 11/13. Economists were looking for an increase of 5,000. A separate report released later showed the Philadelphia Fed Manufacturing Survey jumping to 22.5 in November, from only 1.0 in October and much better than the 5.0 that economists had expected. Investors reacted positively to the day's data and other news. The Dow Jones Industrial Average is up 180 points midday. The NASDAQ added 47.5. Options volume is respectable, with 5.5 million calls and 4.2 million puts traded through 12:30 ET.

Bullish
Citigroup (C) calls are busy. Shares are up a dime to $4.29. 364,000 calls and 72,000 puts traded on the bank so far. Morning trades included large blocks of December 4.5 calls traded at 8 cents on the International Securities Exchange [ISE]. Sentiment data from the ISE, known as ISEE, indicate that investors were buying-to-open new positions. According to ISEE, more than 90,000 Citi calls were bought-to-open on the ISE between 10:20 and 10:30 ET Thursday morning.

Allied Irish Banks (AIB) has added 14 cents to $1.22 on hopes European Union [EU], International Monetary Fund [IMF], and Irish officials will reach an agreement about a bailout of Ireland's banking system when they meet today. AIB shares are up and options volume is 6X the recent average daily, with 8,820 calls and 475 puts traded on the Irish bank so far. December 1.5, February 1, and May 1.5 calls are the most actives.

Bearish
Kohl's (KSS) is up $1.15 to $53.95 and a noteworthy trade today is a December 50 put – 57.5 call combo at a 10-cent credit, 5250X. In this trade, the investor apparently bought 5250 December 50 puts at the 45-cent ask price and sold 5250 December 57.5 calls on the 55-cent bid. A similar Jan 52.5 – 57.5 “risk-reversal” traded 50,000X yesterday, as some shareholders are perhaps initiating the trades as “collars” to protect positions in KSS shares. If so, they are selling calls to finance the purchase of puts. The puts are used to hedge the stock.

Sempra Energy (SE), a Houston, TX oil and gas company, is up 34 cents to $24.05 and options volume is 6.5X the average daily, with 2,670 puts and 110 calls traded in the name so far. The action is concentrated in the November 24 puts. 2,679 traded and nearly all traded at the asking price, indicating buyers bracing for possible weakness in the share price in the near-term. November options expire at the end of the week. The company held a meeting with analysts in New York yesterday.

Unusual Volume Movers
Pulte Homes (PHM) options volume is running 4.5X the usual, with 44,000 contracts traded and put volume accounting for 84 percent of the activity, according to data from website WhatsTrading.com.

Dendreon (DNDN) options activity is running 2.5X the usual, with 41,000 contracts traded and call volume representing 63 percent of the volume.

NetApp (NTAP) options volume is 2.5X the typical levels, with 36,000 contracts traded and call volume accounting for 62 percent of the activity.

Increasing volume is also being seen in Salesforce.com (CRM), iShares Japan Fund (EWJ), and Smithfield Foods (SFD).

Implied Volatility Movers
The CBOE Volatility Index (.VIX) is plummeting. The market's “fear gauge” is down 2.72 to 19.04 and near session lows, as the S&P 500 rallies 21 points on optimism for a bailout of Irish banks along with stronger-than-expected weekly jobs and manufacturing data Thursday. VIX has now given back all of the gains recorded during Tuesday's turbulent trading session and is off 1.57 points on the week. Meanwhile, trading is active is active in VIX options, with 114,000 calls and 81,000 puts traded in the index so far, according to data from Trade Alert.