Market Up in Response to Earnings 01-21-2011

Cusick's Corner
The market is up (but has faded and is closer to the day's lows) in response to upside surprises from General Electric (GE) (see Bullish Flow) and Google (GOOG). Financials were the leading sector, even though Bank of America's (BAC) earnings were not as strong as expected. It is Expiration Friday and volume could pick up in the afternoon session. Please call the optionsXpress trade desk early if you have any questions about your expiring option positions. See you After Hours.

Stocks are trading mixed on Expiration Friday. With no economic data to guide the early action, the focus was on earnings. Google (GOOG) grabbed the spotlight late Thursday after announcing a 29-percent increase in profits and that co-founder Larry Page will take over as Chief Executive. General Electric (GE) is up 6.3 percent and leading the Dow Jones Industrial Average to higher ground after reporting earnings that topped Street estimates. However, BofA (BAC) is off 1.5 percent and among 13 Dow stocks moving lower after the bank's latest earnings report failed to inspire a move higher in the share price Friday. 17 components of the industrial average are up and the Dow has added 35 points. The tech-heavy NASDAQ gave up early gains and is down 6.7points. The CBOE Volatility Index (.VIX) edged up .11 to 18.10. Trading remains active due to the options expiration, with 6.6 million calls and 5.5 puts traded through 12:30pm ET.

Bullish Flow
GE is rallying on earnings. Shares surged 6.8 percent to $19.68 and are trading near session highs midday Friday. The General reported a 36-cent per share quarterly profit, which beat Street estimates by four cents. Revenues rose to $41.2 billion, which was also head of expectations ($39.9 billion). GE is rallying and options are seeing very heavy trading, with 412,000 calls and 127,000 puts traded through midday. A lot of the action is closing activity in January options ahead of tomorrow's expiration. Today is the last day to trade January 2011 options. However, the most actives are the February 19 calls, with 98,100 traded. Some investors seem to be taking bullish positions in February 20 and March 19 calls as well.

Large blocks of calls traded in Pfizer (PFE) Friday morning. Shares are up two pennies to $18.26 and a block of 18,500 January 15 calls was sold at $3.20 per contract in morning action. Twenty minutes later, a block of 16,400 January 2013 $25 calls was bought at 48 cents per contract. The action is probably a roll out and up in strikes. That is, the investor is banking a profit on the in-the-money January 2011 calls and looking for the rally in PFE to continue through 2013. They're opening a new position in the longer-term 2013 calls at the $25 strike.

Bearish Flow
Synaptics (SYNA) shares are under pressure and puts are actively traded after the Sunnyvale, CA computer component maker reported earnings late-Thursday. Although the headline earnings and revenue numbers beat Street estimates, the company's touchpad sales to the PC market fell short of expectations. SYNA is trading down $3.13 to $28.92 and action is brisk in the January 29, February 29, and February 30 puts. Investors are likely closing positions in the January 29s. New positions are being initiated in the February 29 and 30 puts on concerns about additional losses in the stock over the next four weeks.

Unusual Volume
The biggest options trade so far today is in Citigroup (C). Shares are up 9 cents to $4.88 and a block of 65,000 January 2012 $7.5 calls was sold at 12 cents per contract. This contract is 53.7 percent out-of-the-money with exactly 12 months of life remaining. In addition, open interest is more than 2 million. Consequently, there is a high probability that this is a closing trade, as one investor scales back their expectations for a move above $7.5 per share in Citi through early 2012.

Genzyme (GENZ) options volume is running 5X the average daily, with 92,000 contracts traded and put volume accounting for 67 percent of the volume, according to data from WhatsTrading.com.

Morgan Stanley (MS) options volume is 2X the average daily, with 62,000 contracts traded and call volume representing for 75 percent of the activity.

Schlumberger (SLB) options volume is running 3X the average daily, with 61,000 contracts traded and put volume accounting for 52 percent of the activity.

Increasing options activity is also being seen in AMD, F5 Networks (FFIV), and Homebuilders ETF (XHB).

Implied Volatility Mover
CBOE Volatility Index (.VIX) is up .13 to 18.12 and has now recovered the entire 9.8 percent drop suffered the week before. VIX is up 17.2 percent this week and touched a high of 18.85 yesterday, which is its best levels since early-December. Major averages struggled Wednesday and Thursday, despite strong economic data and mixed earnings news. Concerns about rate hikes in China and profit-taking seem to be the primary reasons for market weakness. The S&P 500, which touched a new 52-week high Tuesday, traded down 1.2 percent Wednesday and Thursday. However, the index is up 22 percent since August. VIX is down from 27.2 during that time.