The Stars Have Aligned 01-12-2011

Cusick's Corner
The stars are aligned: the EU bond offerings have been solid; economic data here and abroad is solid too; fear of inflation is lower; liquidity ample -- all necessary ingredients for a roaring bull market. Now the key to trading in this environment is being nimble and trading the sectors that are on the move, i.e. Semis (SMH). The Semiconductor sector has been on the move over the last week or so and activity in names like INTC, AMD, MU and AMAT has been brisk and bullish. Now, if you have a hard time choosing the right stock but have success in choosing the sector to trade, then ETFs could be your bag. In the Semis example, you could consider buying bull call spreads or selling bull put spreads (for income traders). The reason I suggest utilizing spreads is that spreads mitigate time decay and any potential volatility moves. Mitigating those factors allows option traders to potentially be more patient. Yes, the trade off is that you give up some profit potential, but I like to sleep at night – some food for thought. See you After Hours.

Stocks are broadly higher on diminishing concerns about the European Debt Crisis and a rally in the commodities markets Wednesday. The table was set for morning gains on Wall Street after markets moved broadly higher across Europe on news of a successful auction of Portuguese debt. Spain's IBEX paced the advance with a 5.4 percent surge. In the US, the financial sector is showing relative strength, BofA (BAC) and JP Morgan (JPM) are the biggest gainers in the Dow Jones Industrial Average. Exxon Mobile (XOM) and Chevron (CVX) are helping the Dow after crude oil gained another $1 to $92.11 a barrel. The industrial average is up 100 points and the NASDAQ has added 16.5. The CBOE Volatility Index (.VIX) lost .60 to 16.29. Trading in the options market remains active, with 5.3 million calls and 3.9 puts traded through 12:30pm ET.

Bullish Flow
Mosaic (MOS) calls are actively traded Wednesday morning after a bullish USDA crop report sparked gains across the grain markets, including corn, wheat and soybean futures. MOS and a number of other agricultural chemical companies (IPI, POT, CF, and AGU) are trading higher on the news. MOS touched a new 52-week high and added $3.05 to $79.19 through midday. Meanwhile, in options action, 29,000 calls and 5,530 puts traded in the name through midday. March 85 calls, which have traded 11,155X, are the most actives. 75 percent traded at the ask, indicating that buyers are taking positions and looking for a possible move beyond $85 per share through the March expiration.

Micron Technology (MU) calls are seeing heavy trading. Shares are outperforming, gaining 50 cents to $9.22. Meanwhile, in options action, 79,000 calls and 26,000 puts have traded on the chipmaker. January 9 calls, which are now 22 cents in-the-money, are the most actives. 17,900 traded and some investors might be closing winning positions ahead of next week's expiration. February 9 and 10 calls are seeing very heavy trading as well.

Bearish Flow
The biggest options trade in the market so far Wednesday is a block of 80,000 February 121 puts on the SPDR 500 Trust (SPY). The so-called “Spyders” is an exchange-traded fund that holds all of the S&P 500 stocks and is up $1.15 to $128.59. The big block of February 121 puts was part of a strategy called a butterfly spread. In this position, the strategist sold 80,000 February 121 puts, bought 40,000 February 126 puts and bought 40,000 February 116 puts. They paid a net debit of 53 cents per fly. This butterfly is a directional play, as it makes its best profits if shares fall to $121 by the February expiration. An institutional investor probably initiated the spread as a hedge.

Large blocks of puts traded in EBAY as well. Shares of the online auctioneer are up 23 cents to $28.59 and today's options action includes a block of 20,000 July 26 puts at $1.54 and 20,000 January 29 puts at $1.23. Both traded on the PHLX, where a source on the exchange tells us that January puts were sold and July puts purchased. This appears to roll a bearish position or a hedge out an additional six months.

Unusual Volume
Technology Select Sector Fund (XLK) options volume is running 8.5X the average daily, with 112,000 contracts traded and call volume accounting for 93 percent of the volume, according to data from WhatsTrading.com.

Micron Tech (MU) options volume is 2.5X the average daily, with 107,000 contracts traded and call volume representing for 75 percent of the activity.

EBAY options volume is running 3X the average daily, with 59,000 contracts traded and put volume accounting for 82 percent of the activity.

Increasing options activity is also being seen in National Oilwell (NOV), Abbott Labs (ABT), and Noble Energy (NE).

Implied Volatility Mover
PMC Sierra (PMCS) implied volatility is moving higher along with the share price. Shares are up 20 cents to $9.01 and options volume is running more than 20X the average daily, with 5,770 calls and 99 puts traded in the name. Speculative buying is being seen in January and February $9 and $10 calls. Implied volatility is up nearly 15 percent to 42.