Market is Holding Support 01-10-2011

Cusick's Corner
Support – that's the key term to this market in the short-term. The market is holding support even after the data missed expectations Friday, the market held critical short-term support of 1260 on the S&P. I am watching the longer term trend lines to monitor any developments if this month-long trend support is broken. We are getting back to earnings season and the fact that volatility will be entering the market. Volatility trading strategies, specifically those geared towards higher volatility should be reviewed. We will talk more this afternoon after we see how this market closes today.

Stocks are broadly lower in cautious trading Monday. With no economic data or earnings to guide morning trading, some of the focus turned to overseas markets. Major averages are broadly lower across Europe on renewed worries about the debt crisis after officials urged Portugal to accept a bailout. A 1.6 percent decline in France's CAC 40 Index helped pace the decline across the Euro-zone. Meanwhile, some pre-earnings jitters might be affecting trading as well. Alcoa (AA) unofficially kicks off the fourth quarter earnings reporting season with a release after the closing bell. AA is one of nine Dow stocks trading higher, 21 are lower, and the industrial average is down 52 points. The NASDAQ lost 7.4. The CBOE Volatility Index (.VIX) gained .89 to 18.03. Trading in the options market is active, with 3.1 million puts and 3.9 puts traded through 12:15pm ET.

Bullish Flow
Intel (INTC) calls are seeing interest ahead of earnings later this week. The world's largest chipmaker is due to release results Thursday. Shares are flat at $20.65 today and options volume includes 83,000 calls along with 44,000 puts. The top trades are part of a ratio spread, in which the investor apparently bought 5,000 January 21 calls and sold 10,000 January 22.5 calls, for a net debit of 26.5 cents (per 1X2). This might be a bullish bet, as the max pay-off from this spread is at $22.5 at the January expiration. However, it might be a closing or offsetting trade as well. January 2011 options expire in 11 days.

Micron Technology (MU), another semiconductor company, is off 22 cents to $8.43 and options volume is running 2.5X the average daily, driven by a massive spread in the April 10 – 11 calls. The bullish spread traded at 18 cents, 21000X, and might add to bullish positions. Open interest in both contracts is more than 42,000. Tomorrow's open interest data will probably indicate whether this spread is closing or a new position. If opening, it's an aggressive play. The spread offers an 82 cent pay-off (excluding commissions), if shares rally to $11 through the April expiration.

Bearish Flow
The top options trades so far today are in the iShares Emerging Markets Fund (EEM). Shares are down 57 cents to $46.68 and one investor sells 45,000 February 42 puts at 32 cents and buys 30,000 February 46 puts at $1.21. This Feb 46 – 42 (1x1.5) put ratio spread, for a net debit of 73 cents, is probably a hedge. That is, an investor was setting up the spread to offset some of the risk of holding shares of companies from the emerging markets.

First American (FAF), a Santa Ana, CA surety and title insurance company, is trading up a dime to $14.83 and July 15 puts are seeing interest. The top trade is 1,357 contracts at $1.95 when the bid-ask was $1.60 to $1.95. A total of 1,528 have now traded and, since open interest is 1,032, it looks like some investors are taking new positions in these puts. An investor looking to hedge a position in shares might have initiated the purchase, or it might be outright put buying and bearish plays in First American Monday.

Micron Technology (MU) options volume is running 2.5X the average daily, with 80,000 contracts traded and call volume accounting for 80 percent of the volume, according to data from WhatsTrading.com.

SuperValu (SVU) options volume is 4X the average daily, with 34,000 contracts traded and put volume representing for 80 percent of the activity.

Dupont (DD) options volume is running 3X the average daily, with 33,000 contracts traded and call volume accounting for 51 percent of the activity.

Increasing options activity is also being seen in Apollo Group (APOL), KB Homes (KBH), and Celgene (CELG)

Implied volatility Mover
Apollo Group (APOL) implied volatility is moving higher ahead of earnings. As noted in Friday's commentary, shares were down and put volume up late last week. Today, APOL is down another $2.41 to $35.57. Options volume includes 19,000 puts and 13,000 calls, which is 3.5X the average daily for the education company. Meanwhile, implied volatility is up 10 percent to 56 ahead of the results, due after the closing bell.