Energy XLE & USO Were Leaders 12-02-2010

Cusick's Corner
The market continues to plow forward and Energy, both XLE & USO were the end of day leaders. Jan Crude futures, CLF11 $1.21 came off highs that we have not seen in over 2 years. Now with this move, traders in energy stocks could be looking to potentially “roll” positions that are in December expiration cycle out to Jan or March. This is a prudent way to take profits while continuing bullish sentiment. If the underlying has moved to the upside, may even choose to roll not only out to a further expiration month, but also move up in strike price, using profits and thus mitigating capital risk. Example: You purchased Dec 20 calls in XYZ energy stock and the stock and sector experienced a nice move, the underlying is up 10% to $22. You could decide to close the 20 call and buy the 22 call, for a credit, thus you have taken profits and you continue to have a position in the underlying that could potentially appreciate if the underlying continues to move up through Jan expiration. To do this in your oX account, just go to the Position page and click “roll”, this will take you to the spread screen where all you have to do is enter the second leg of the position that you desire to roll too. See you Midday.

Investors brushed aside poor weekly jobless claims numbers and stocks finished with solid gains Thursday. Jobs were in focus early ahead of key payroll data Friday morning and after the Labor Department reported that weekly jobless claims increased by 26,000 to 436,000 in the latest period, and about 14,000 more than expected. However, the euro held higher ground and major averages across Europe were showing solid gains for a second day before the opening bell on Wall Street. UK's FTSE, France's CAC 40 and Spain's IBEX all gained more than 2 percent. So, the Dow Jones Industrial Average, which surged 250 points Wednesday, held steady in morning action and the rally was extended after pending home sales numbers showed a much stronger-than-expected increased of 10.4 percent during the month of October. Mostly upbeat same store sales numbers from a various retailers along with a bullish research note about the banks courtesy Goldman Sachs added fuel to the fire. For the day, the Dow Jones Industrial Average tacked on another 106 points and the NASDAQ added 30.

Bullish Flow
Home Depot (HD), the largest home improvement retailer, rallied 5.5 percent to $33.36 and was the best gainer in the Dow Jones Industrial Average Thursday. Meanwhile, Lowe's (LOW), the second biggest, gained $1.17 to $24.92 and options volume hit 7.5X the typical levels. 90,000 LOW calls and 28,000 LOW puts changed hands today. The biggest trade was a block of 12,252 January 26 calls at 66 cents when the market was 63 to 65 cents. The trade looks like an upside call buyer anticipating additional gains in Lowe's through early 2011. 24,850 January 26 calls traded total. December and January 24 call options on Lowe's saw brisk trading as well.

Bullish options action was also seen in Amkor Technology (AMKR), Krispy Kreme Doughnuts (KKD), and Adobe (ADBE).

Bearish Flow
NY Times (NYT) saw interesting trading activity. Shares of the newspaper publishing company lost three cents to $9.07 and options volume increased to 6X the normal. 4,660 puts and only 75 calls traded in NYT Thursday. January 9 puts were the most actives and included several lots at the 75 and 80-cent asking price. 3,630 traded total and, since open interest is 788 contracts, it looks like some investors were buying to open new positions in these Jan 9 puts. The bearish trading might be a play on recent reports that newspaper-advertising revenues are slowing, according to the Newspaper Association of America.

Bearish flow also picked up in Etrade Financial (ETFC), Gerdau (GGB), and JB Hunt (JBHT).

Index Trading
Russell 2000 Small Cap Index (.RUT) call spreads were busy for a second day. The index of smaller-sized companies added 8.01 to 751.20 today and is up more than 24 points, or 3.3 percent, since Tuesday. Meanwhile, 121,000 calls and 41,000 puts traded on the Russell Thursday. Like yesterday, some investors were showing interest in the December 790 – 800 call spread. For example, a block of 20,525 December 790 calls traded on the 85-cent bid coincided with a block of 20,525 December 800 calls on the 35-cent asking price. Like Wednesday, it looks like this spread is being sold and seems to be a bet that the index will hold below 790 (which is 5.2 percent above current levels) over the next two weeks and into the December expiration. The spread traded 53000X on the day.

ETF Trading
A massive spread traded in the Financial Select Sector Fund (XLF) Thursday. Shares finished up 38 cents to $15.13 after Goldman Sachs wrote a positive research note saying that banks are benefitting from an improving economy, strengthening equities market, and a favorable interest rate environment. One options strategist seems to be looking for additional upside in the financials during the weeks ahead. In afternoon action, a block of 50,000 XLF January 16 calls traded at 18 cents and a block of 50,000 XLF January 17 calls for a nickel. Excluding commissions, the spread, for a net debit of 13 cents, would breakeven at the expiration if XLF is at $16.13 or higher, $1 above current levels. It offers a possible 87 cent pay-off if shares rally to $17 or more during that time. The Financial Select Sector Fund is an ETF that holds all of the financial names from the S&P 500.