Are There Any More Surprises? 02-28-2011

Cusick's Corner
This market is no surprise, continuing to grind to the upside in the face of escalating tensions in the Mid-East. This situation gave some longs the out and a way to take short-term profits. But many did not abandon their upside resolve, as we saw last week, and increased options volume continued. There was increased demand for April Crude call options in the 125 and 145 strikes, which as I discussed last week, helped concerned investors raise cash based on sentiment while still positioned in the market. This afternoon I will discuss some strategies that fit sentiment and perception of volatility which has been on the move the last week. See you After Hours.

Stock market averages are higher with help from economic news Monday. Data released early showed January personal incomes and spending up 1 percent and .2 percent. Economists were looking for increases of .3 percent and .4 percent, respectively. A separate report released later showed the Chicago Purchasing Manager's Index, a gauge of regional manufacturing activity, up to 71.2 in February, from 68.8 the month before and much better than the 67.5 that economists had predicted. A third report showed pending home sales down 2. 8 percent, not as bad as the 3.2 percent decline that was expected. Stable oil prices and a global merger activity seem to be helping bolster sentiment as well. The Dow Jones Industrial Average is up 86 points and the tech-heavy NASDAQ has added 3.3. The CBOE Volatility Index (.VIX) is down .60 to 18.62. Overall options volume is on the light side, with 3.9 million calls and 3.2 million puts traded through 12:35pm ET.

Bullish Flow
A bullish three-way spread trades in JP Morgan (JPM) midday Monday. Shares of the bank are down 3 cents to $45.56 and one of five Dow stocks under water. Meanwhile, in options action, one strategist apparently sold 2,500 January 35 puts at $2.98 and bought the January 50 – 60 call spread at $3.13, 2500X. They paid a net debit of 15 cents for the three way and could potentially make $9.85 (minus transaction costs) if shares rally to $60 by the January expiration. By writing January 35 puts, they are also stating that they are willing to buy the stock at that price level through the expiration.
Coeur D'Alene (CDE), a silver miner, is trading up $3.52 to $31.17 and 14,000 calls have traded in the name, which is 4X the 22-day average call volume. Shares are rallying after the company reported a quarterly profit of 56 cents per share, which trounced Street estimates of 32 cents. March 60 call options are the most actives. More than 6,000 traded. Other March calls, with strikes ranging from 29 to 35, are seeing interest as well, as some short-term players react to the upside volatility in CDE shares. March options expire in 18 days.

Bearish Flow
An interesting spread trades in Iron Mountain (IRM) Monday morning. Shares are down 6 cents to $26 and in this three-way, the strategist sold 10,000 July 25 calls at $2.24 and bought the July 20 – 22.5 put spreads at 45 cents, 10000X. $1.79 was collected on the three-way and it probably closes a position opened on December 10 when the same trade was initiated at 87.5 cents. They appear to be banking the profit now that shares have rallied beyond the $25 strike price of the call option and might be looking for shares to give back some recent gains before the July expiration.

SPDR Financials (XLF), which is the exchange-traded fund that holds all of the financial names from the S&P 500, sees a noteworthy trade today. Shares are up 3 cents to $16.80 and an April 15 – 16 – 17 put butterfly spread trades at 25 cents, 10000X. In this spread, the strategist apparently sold 20,000 of the April 16s for the body of the fly and bought 10,000 of both the April 15s and 17s for the wings. It's a bearish play, as the spread makes its best profits if shares fall to $16 by the April expiration.

Unusual Volume
Iron Mountain (IRM) options volume is running 27X the (22-day) average, with 34,000 contracts traded and put volume accounting for 67 percent of the volume.

SPDR Utilities (XLU) options volume is 2X the average daily, with 25,000 contracts traded and call volume representing for 85 percent of the activity.

Staples (SPLS) options volume is running 11.5X the average daily, with 18,000 contracts traded and call volume accounting for 89 percent of the activity.

Increasing options activity is also being seen in HSBC (HBC), Omnivision Tech (OVTI), and Range Resources (RRC).

Implied Volatility Mover
HSBC (HBC) shares are trading down $2.19 to $55.08 and options trading is brisk after UK's financial services giant reported a 2010 profit that fell short of expectations. 12,000 calls and 4,560 puts traded on the bank so far. March 55 and 57.5 calls are the most actives, as some investors might be liquidating positions on the news. Implied volatility is down 7 percent to 26.5.