Longs May Need to Marry 12-15-2010

Cusick's Corner
This market continues to grind but what is notable (I may be sounding like a broken record) is that it is just so bullish with CBOE Put/Call Ratio .65. What I mean is there is low volatility, great earnings, decent economic data, low inflation and low interest rates and yet everyone is long, both calls/stocks, with no protection. In other words Big and Small strategists are in the market unprotected, the boat is tilted to one side and still sailing along. So what is there to take away -- longs need to marry protection, i.e. puts, and scale into positions, 20%/30%/50%. If the boat tips up or down, you will want a life vest. See you After Hours.

Stocks are little changed following a round of mixed economic news Wednesday. Data released before the bell showed the Consumer Price Index [CPI], which measures inflation at the consumer level, up just .1 percent in November and half as much as expected. The latest NY Empire State manufacturing index was encouraging as well. It rose to 10.57 in December, from –11.14 last month and better than the 3.0 that economists had expected. Industrial Production numbers, at .4 percent in November, were also better than the .3 percent that economists had expected. However, the NAHB Index of Homebuilder Sentiment [HMI] remains unchanged at 16 this month. Economists were looking for an increase to 17. Meanwhile, some investors are keeping an eye on the bond pits, where the benchmark ten-year Treasury has been pummeled and yields have been rising in recent days. The ten-year caught a bid early, but the gains faded and its yield is now at 3.46 percent and its best levels since May. Consequently, the tone of trading in the equity market is somewhat cautious as well. The Dow Jones Industrial Average is up 31 points and the NASDAQ has added 6. The CBOE Volatility Index (.VIX) is off .13 to 17.48. Options trading is running about the usual levels, with 4.1 million calls and 3.0 million puts traded through 12:30 ET.

Bullish
Petrohawk (HK) calls are busy. Shares are flat at $18.55 and saw an uptick after the stock was talked up on CNBC midday. 16,000 calls and 1,530 puts traded in the Houston, TX oil and gas driller. March 19 calls are the most actives. 4,855 traded and, with 77 percent trading at the ask and open interest of 921, it looks like some investors are buying to open new bullish positions. December 19 and January 20 calls are seeing busy trading as well.

Micron Technology (MU) was the subject of an interesting trade today. Shares are down a dime to $7.97 and one investor sells 9,500 April 7 puts at 42 cents each to buy 9,500 April 9 calls at 59 cents. This bullish “risk-reversal” might be a play on the chipmaker's earnings, which are due out December 20. However, since the focus is on April options, they seem to be looking for gains in the shares through early-2011 as well.

Bearish
A noteworthy block of puts traded on the iShares FTSE China Fund (FXI) Wednesday morning. Shares are off $1 to $42.78 after fears of rate hikes triggered volatility in China's equity markets, particularly the financials. Hong Kong's Hang Seng lost 2 percent Wednesday. Meanwhile, in FXI options action, one player bought a block of 20,000 February 37 puts at 35 cents per contract. It's likely a short-term hedge should the volatility in China's equity markets continue into early-2011.

Put volume is picking up in Research In Motion (RIMM) ahead of earnings. Shares are off $1.36 to $59.09 and large blocks of January 50 puts traded at the 66-cent asking price. More than 23,000 contracts have now traded, as some investors appear to be bracing for a possible move lower in RIM when the company reports earnings tomorrow after the closing bell tomorrow. 55,000 calls and 76,000 puts now traded in the name.

Unusual Volume Movers
Best Buy (BBY) options volume is running 2X the usual, with 59,000 contracts traded and call volume accounting for 53 percent of the activity, according to data from website WhatsTrading.com.

MannKind (MNKD) options activity is running 3.5X the usual, with 50,000 contracts traded and call volume representing 67 percent of the volume.

Visa (V) options volume is 2X the typical levels, with 45,000 contracts traded and put volume accounting for 59 percent of the activity.

Increasing volume is also being seen in Joy Global (JOYG), Verisign (VRSN), and Adobe (ADBE).

Implied Volatility Movers
Mannkind (MNKD) implied volatility is elevated, as the market braces for a December 29 FDA review of the biotech's Afrezza treatment. Shares are up 60 cents to $9.06 today and up more than 44 percent month-to-date. Options trading is brisk as well. 35000 calls and 17000 puts traded through midday Wednesday. Meanwhile, implied volatility is up 6 percent to 225 and extremely elevated ahead of the FDA news.