The Trend is Your Friend 12-10-2010

Cusick's Corner
The market is in a grinding mode but it is still to the upside. At this stage, patience and discipline are essential. If you have missed the trend so far, consider using strategies that may give up some profit potential but mitigate risk. There in not much to say other than the trend is your friend, stick with it. See you After Hours.

Major averages are holding modest gains in another day of quiet trading Friday. Economic news was in focus early after data showed the nation's trade balance narrowing to $38.7 billion in October, from $44.6 billion in September and much better than the $38.7 billion that economists had expected. Stocks opened steady on the news and the gains held through the University of Michigan's Consumer Sentiment Index, which showed an improvement to 74.2 so far in December, up from 71.6 late-November and also better than the 72.5 that economists had predicted. Steady trading overseas and relatively quiet action across the commodities and bond markets have helped sentiment on Wall Street as well. The Dow Jones Industrial Average is up 17 points and the NASDAQ added 12 through midday The CBOE Volatility Index (.VIX) is flat at 17.25. Trading in the options market remains active, with about 4.5 million calls and 3 million puts traded through 12:00 ET.

Bullish
AIG calls are seeing a second day of brisk trading. Shares rallied yesterday on news AIG will pay back its debt to the Federal Reserve and the Treasury Department. AIG touched a new 52-week high and is up another 91 cents to $48.69 Friday. Options volume is 4.5X the average daily. 72,000 calls and 21,000 puts now traded. December 49, 50 and 55 calls, which expire at the end of next week, are among the most actives. January 50, 60 and 65 calls are seeing interest as well.

An impressive spread trades in Cisco Systems (CSCO) Friday. Shares are off a penny to $19.68 and one player bought 20,000 January 17.5 calls at $3.70 and sold 20,000 January 20 calls at $2.30. The spread, at a net debit of $1.40, offers a possible $1.10 pay-off (excluding commissions) if shares move above $20 and hold above that level through the January 2012 expiration. It might also be a position adjustment or a closing spread, as open interest is sufficient to cover in both contracts. Monday's open interest update will likely shed further light on the matter.

Bearish
Gannett (GCI), the newspaper company, is up 20 cents to $15.73 and has rallied 13.3 percent over the past two weeks. Meanwhile, options volume is running 2X the average daily today, with 3,630 puts and 735 calls traded in the name so far. The January (2012) 15 puts are the most actives. 2,765 traded. In addition, with 90 percent of the volume trading at the ask and only 711 contracts in open interest, it looks like some investors are buying to open new positions and bracing for a possible decline in the share price in 2011. A shareholder looking to protect recent gains might have initiated the trades.

IShares Russell 2000 Small Cap Fund (IWM) touched a new 52-week high and is up 66 cents to $77.45 today. Meanwhile, the top two options trades in the exchange-traded fund are 10,000 March 74 puts at $2.65 and 10,000 March 68 (Quarterly) puts at $1.53. This looks like a bearish vertical spread for a net debit of $1.12 and possibly a portfolio manager looking to hedge risk through March of 2011.

Unusual Volume Movers
Tennet Healthcare (THC) options volume is running 27X the usual, with 56,000 contracts traded and call volume accounting for 72 percent of the activity, according to data from website WhatsTrading.com.

IShares Japan Fund (EWJ) options activity is running 6X the usual, with 51,000 contracts traded and call volume representing 99 percent of the volume.

Popular (BPOP) options volume is 27X the typical levels, with 44,000 contracts traded and put volume accounting for 89 percent of the activity.

Increasing volume is also being seen in Sandridge (SD), MannKind (MNK), and Iron Mountain (IRM).

Implied Volatility Movers
Tennet Healthcare (THC) options are seeing heavy trading and implied volatility is up on news Community Health (CYH) has made a bid for the company. THC rallied $2.36 to $6.65 on the news. Options volume is 25X the average daily. 42,000 calls and 16,000 puts traded. Implied volatility is up 5.5 percent to 48.5, suggesting that some investors expect the volatility in the shares to continue. THC rejected the $6 per share bid as inadequate and Reuters is reporting that Community Health might need to raise its offer to get the deal done.