Some Strategists Road Trip with Ford Options Today 02-25-2011

Cusick's Corner
The bounce in the market into the Midday gives traders and investors a sigh of relief, but it's just for the moment. As I noted on Tuesday and Wednesday, there was a lot of selling but it was not a panic-stricken kind of selling, but rather looked like some bigger traders liquidating holdings. Seeing a bounce today, especially with a lull in the headlines, is not all that unusual. However, this action is not typical of recent pullbacks where the bid appeared to take advantage of the dips. Currently, it's more of a bounce from short-term oversold conditions. The concern is not that the market is in the midst of a trend change, but that the momentum that has sustained the last 30 months to the upside now opens the door for further down draft potential. Technically consider the short- and mid-term moving averages, 5 SMA vs. 35 SMA, as potential barometer of trend. The market has held critical levels, 1300 on the S&P, so the overall trend is in place but the reduced momentum does raise a red flag for some more potentially volatile activity on the horizon. See you After Hours.

Stocks are broadly higher on diminishing fears about the recent spike in crude oil prices. After an 8 percent rally in the past week, crude is flat at $97.28 per barrel Friday. Meanwhile, the day's economic news is mixed. Data released early showed GDP improving at a 2.8 percent annual rate in the fourth quarter, which was well below expectations of 3.3 percent. However, separate data released later showed the University of Michigan's Consumer Sentiment Index up to 77.5 in late-February, from 75.1 earlier this month and significantly better than the 75.1 the month before. The data failed to make much of a ripple on Wall Street, however, as the focus remains on oil and events overseas. It's been relatively uneventful so far. The Dow Jones Industrial Average has traded in a 79-point range and is up 50 points. The tech-heavy NASDAQ gained 35 points. The CBOE Volatility Index (.VIX) is down 2.09 to 19.23. Overall options volume is slowing ahead of the weekend, with 5.1 million calls and 4.2 million puts traded through 12:45pm ET.

Bullish Flow
Ford Motor (F) shares are trading up 26 cents to $14.96 and trying to rebound after falling nearly 22 percent since January 27. Options are actively traded, with 110,000 calls and 56,000 puts traded so far. Among the biggest trades of the day is a June 17 – 20 (1X2) call ratio spread. In this strategy, the investor apparently bought 5,500 June 17 calls at 48 cents per contract and sold 11,000 June 20 calls at 11 cents. This 1X2, for a net debit of 26 cents, is a bullish play. It makes its best profits if shares rally to $20 at the June expiration. The breakeven is at $17.26 and 15.4 percent above current levels. The debit is at risk if the stock fails to move higher. There is additional risk to the upside, as only half of the June 20 calls are covered by the 17s.

Tenet Healthcare (THC) touched a new 52-0week high and is trading up a nickel to $7.02 after the company posted profits that topped Street estimates. Today's options volume in Tenet includes 5,680 calls and 450 puts. Most of the action surfaced just after the opening bell and included blocks of May 7 calls the asking price of 40 and 45 cents per contract. 5,300 traded total and one or more investors might be buying these calls as a way to play the recent strength in the stock. It might be closing trades, however, as open interest is 26,821 and currently the second largest position in the name.

Bearish Flow
Novatel Wireless (NVTL), a San Diego, CA diversified communication services provider, is reeling and puts are active after the company posted weaker-than-expected fourth quarter results and also guided estimates lower for the first quarter. NVTL is down $1 to $5.74 per share. 3,140 puts and 200 calls traded in the name so far. The September 4 puts, which are more than 30 percent out-of-the-money, are the most actives. 2,100 traded. 81 percent traded at the ask, indicating that buyers are driving the flow. Open interest is only 410 contracts and so the action looks opening as well.

SPDR Financials (XLF), which is the exchange-traded fund that holds all of the financial names from the S&P 500, is trading up 22 cents to $16.76 and a noteworthy trade today is a March 15 – June 15 (2X1) put ratio spread at 26 cents. In this play, the strategist sold 50,000 March 15 puts at a nickel and bought 25,000 June 15 puts at 36 cents. In all likelihood, this spread is a roll. That is, the investor is selling to close a massive position in March 15 puts while opening a new bearish position, half the size, in June 15 puts. An institutional investor might have initiated the spread to extend a hedge an additional three months.

Unusual Volume
Sara Lee (SLE) options volume is running 3X the (22-day) average, with 64,000 contracts traded and call volume accounting for all of the volume.

Salesforce.com (CRM) options volume is 2.5X the average daily, with 47,000 contracts traded and call volume representing for 54 percent of the activity.

Omnivision Tech (OVTI) options volume is running 5X the average daily, with 27,000 contracts traded and call volume accounting for 80 percent of the activity.

Increasing options activity is also being seen in Range Resources (RRC), El Paso (EP), and Sun Trust (STI).

Implied Volatility Mover
Leapfrog Wireless (LF) implied volatility is higher after Piper Jaffray analysts said today that MGA Entertainment has expressed interest in LF. Shares are up 25 cents to $4.49. Meanwhile, call volume is approaching 2000 contracts in LF. Zero puts have changed hands. Implied volatility is rallying 15.5 percent to 70.