Market Reacts to Bush Tax Cut Extension 12-07-2010

Cusick's Corner
One large uncertainty just got a lot more certain. Will the Bush tax cuts be extended? Well, we have 2 more years now and the market likes it. This will also start to put some more scrutiny on the jobs data because now businesses have a clearer understanding of the future tax implications, so one would think that hiring, especially for the small business owners, should or could commence. This just ramped up the fast break on risk assets, equities, and has really pumped up Industrials, Copper and Crude. We are seeing that short term traders are taking an opportunity to get out of the swing equity trades they might have had on in the wake of this tax headline. The industrial story might be a little more volatile, especially the Copper markets that are flying in the face of continued inflation risk in China, worth keeping an eye on. See you After Hours.

Stocks opened broadly higher on news President Obama is extending tax cuts, but the major averages are trading off session highs through midday. With no economic data or earnings of significance to guide the action, the table was set for morning gains on Wall Street on news Bush tax cuts would be extended an additional two years. Yet, the morning advance stalled after some of the commodities, like gold and crude oil, gave up early gains and fell into the red. The euro, which traded north of 1.334 on the buck, also gave back its advance and is down to 1.325. Meanwhile, the Dow Jones Industrial Average is up 54 points, but 35 points off its best levels. The NASDAQ added 17.5. The CBOE Volatility Index (.VIX) is down another .51 to 17.51. Trading in the options market is very active, with about 7.7 million calls and 4.1 million puts traded through 12:30 ET.

Bullish
Citigroup (C) call options are seeing very heavy trading on news the government is selling its remaining stake in bank. C is up 17 cents to $4.62 and in the midst of a seven-day 12.5 percent winning streak. Options volume surged, as 1.7 million calls and 352,000 puts traded on the bank. The call volume in Citi represents nearly 20 percent of the day's total call volume across all options Tuesday. Citi Jan2012 calls at the 5 strike are the most actives, with volume now surpassing 375,000. January2011 4.5 and 5 calls are seeing very heavy trading as well.

Mosaic (MOS) shares rallied $1.18 to $70.50 and 26,000 calls have traded no the fertilizer company through midday. The volume represents triple the normal and compares to put volume of 7,600 contracts. The action is scattered across a variety of different expiration months and strike prices. Dec calls at the 70, 72.5 and 75 strikes are the most actives. Some traders are citing takeover chatter. It's unsubstantiated, but seems to be the reason for the relative strength and bullish trading in Mosaic Tuesday.

Bearish
The top options trade so far today is a block of 84,150 December 69 puts on the iShares Small Cap Fund (IWM). The massive trade was apparently part of a 1X4 put ratio spread, in which the investor traded 21,037 December 74 puts at 30 cents each and also traded 4X as many of the December 69 puts at 4 cents each. The exchange-traded fund is up to a new 52-week high and is up 86 cents to $77 per share through midday. While this might be a short-term hedge (December options expire in 10 days), we're hearing that this spread was sold for 14 cents. So, the strategist is likely exiting a position and salvaging the remaining time value, as the spread is falling deeper out-of-the-money.

Talbot's (TLB) shares tumbled after the company reported earnings that fell short of expectations. TLB is down $2.28 to $9.11 per share and options volume is running 4.5X the average daily. 14,000 calls and 3,500 puts traded so far. December 9, 10, and 11 calls are very busy, as some investors are likely selling short-term calls as shares fall on the earnings news. However, the top trade of the day appears to be a buyer of 1800 Jan 2012 calls at the 15 strike, which might be an investor taking advantage of the weakness to enter a longer-term bullish position in the battered retailer.

Unusual Volume Movers
SLM options volume is running 20X the usual, with 142,000 contracts traded and call volume accounting for 92 percent of the activity, according to data from website WhatsTrading.com.

Sprint Nextel (S) options activity is running 2.5X the usual, with 97,000 contracts traded and call volume representing 67 percent of the volume.

SPDR Homebuilder Trust (XHB) options volume is 2X the typical levels, with 38,000 contracts traded and call volume accounting for 80 percent of the activity.

Increasing volume is also being seen in Yamana Gold (AUY), Sunrise Senior Living (SRZ), and Lyondellbasell (LYB).

Implied Volatility Movers
H&R Block (HRB) implied volatility is elevated and options are actively traded ahead of its earnings, due out after the closing bell today. Shares are up 3.7 percent to $13.50 ahead of the news. Meanwhile, 20,000 calls and 14,000 puts traded on the tax preparation company, which is 4.5X the recent average daily. Players are jockeying for position ahead of the report and the premium buying has implied volatility up nearly 10 percent to 58.5.