Strong Data Boosts Dollar & Market 01-05-2011

Cusick's Corner
The data was strong this morning -- ADP way up, equating in a stronger dollar and market today. I think that this could be a rally built on the anticipation of a good employment report at the end of the week, potentially leading to a buy-the-rumor, sell-the-news activity. Volatility continues to pullback off the highs from the beginning of the week, but pending Jobs data might be a short-term crescendo because why would the Fed have to still utilize QE? I am going to see how the market holds up into the afternoon because it could give a better picture of a potential short-term crescendo building. See you After Hours.

Major averages are holding gains with help from better-than-expected economic news Wednesday. Before the opening bell on Wall Street, ADP reported that the private sector added 297,000 jobs last month. Economists were looking for an increase of only 100,000. Separate data released later showed the ISM Index of non-manufacturing activity up to 57.1 in December, it's best levels since 2006. Economists were looking for the Services Index to increase to only 55.7, from 55.0 the month before. Trading was somewhat aimless in morning action despite the data, but a modest of round of buying interest had surfaced by midday. The Dow Jones Industrial Average is up 27 points and the tech-heavy NASDAQ has added 15. The CBOE Volatility Index (.VIX) lost .42 to 16.96. Trading in the options market is active, with 4.2 million calls and 3.1 million puts traded through 11:45 ET.

Bullish
The biggest options trades so far today are in Citigroup (C). Shares are up a nickel to $4.95 and a block of 50,000 February 5 calls traded at the 19-cent asking price while a block of 50,000 February 5.5 calls traded on the 6-cent bid. The trades have the hallmarks of a vertical February 5 – 5.5 bullish call spread for a net debit of 13 cents. If so, the strategist is probably looking for shares to climb above $5.13 (the breakeven) through the February expiration. Excluding commissions, the potential pay-off is 37 cents per spread if shares rally to $5.5 or more during that time.

Applied Materials (AMAT) calls are busy today. Shares are relatively weak, down a dime to $13.87. Meanwhile, options volume is running at 2X the average daily levels. 11,000 calls and 1,700 puts traded on the chip equipment maker so far. January $14 calls are the day most actives after 8.500 traded. In addition, with 83 percent of the volume trading at the asking price, it appears that buyers are dominating the action and looking for AMAT to move beyond $14 through the January expiration, which is in 16 days.

Bearish
American Eagle Outfitters (AEO) puts are seeing interest Wednesday. Shares are up a nickel to $14.45 and 7,800 contracts traded. The volume represents 9X the normal and compares to call volume of 1,100 contracts. January 14.5 puts are the most actives. 6,700 traded. Existing open interest is more than 19,000 and so the activity might be closing or offsetting. However, some investors might also be adding to bearish positions as a hedge ahead of same store sales numbers. Many retailers will be releasing results for December Thursday morning.

Sprint Nextel (S) options are busy. Shares are up 15 cents to $4.60 and the top trade is 19,300 Feb 4 puts at the 9-cent asking price, which looks like a put buyer. 22,260 now traded. Meanwhile, another investor sold 15,000 January 5 calls at 3 cents. Volume in the contract is now 27,330 traded. Put buying and call selling seems to reflect some underlying concern about the short-term outlook for Sprint, even as shares have risen 22 percent since 12/1.

Unusual Volume Movers
AMR options volume is running 3X the usual, with 48,000 contracts traded and call volume accounting for 94 percent of the activity, according to data from website WhatsTrading.com.

TIVO options activity is running 7X the usual, with 41,000 contracts traded and call volume representing 94 percent of the volume.

Disney (DIS) options volume is 3X the typical levels, with 34,000 contracts traded and call volume accounting for 52 percent of the activity.

Increasing volume is also being seen in Abercrombie (ANF), US Airways (LCC), and HSBC (HBC).

Implied Volatility Movers
HSBC Holdings (HBC) implied volatility is moving higher amid active trading in the options market Wednesday. Shares of the British financial services giant are up $1.25 to $53.32 after UK's FTSE rose another .5 percent, now up nearly 2 percent month-to-date. The rebound seems to have stirred up some interest in HBC options, as 20,000 calls and 5,200 puts have traded on the bank through midday. Implied volatility is 10.5 percent to 21.5.