Higher Oil Threatens Economy 03-01-2011

Cusick's Corner
News out of the Middle East is flowing out, with overnight markets tossing and turning on each headline. I watched the futures trade quite erratically with each headline, but decided that this action was extremely choppy and not worth playing. This choppy action has continued and at the Midday we are on the lows of the session, with some traders now looking for a bounce into the close in the face of rising Crude. Weakness is broad based, but volatility is still low so that a bounce into the After Hours has some potential. See you then.

Stock market averages opened steady, but then reversed direction after Federal Reserve Chairman Ben Bernanke warned that higher oil prices threaten the economy, just as crude erased early losses and made a run higher through midday. In testimony to the Senate Banking Committee, Bernanke said a period of higher oil prices poses risks to the economic recovery. At the same time, crude oil, which was trading lower early Tuesday, was catching a bid on news Iran was cracking down on protestors. Crude has added $1.95 to $98.92 a barrel. Meanwhile, the day's economic news was mixed. Construction Spending fell .7 percent in January, which was .1 percent worse than expected. However, the latest ISM Index of manufacturing activity surprised to the upside. It rose to 61.4 in February, from 60.8 the month before and above economist estimates of 60.5. Yet, events overseas and concerns about higher oil prices continue to overshadow any domestic news. The Dow Jones Industrial Average is down 80 points and the NASDAQ has given up 27. CBOE Volatility Index (.VIX) added 1.27 to 19.62. Overall options volume is picking up from Monday's slow pace, with 4.9 million calls and 4.1 million puts traded through 12:35pm ET.

Bullish Flow
Sonus Networks (SONS) sees relative strength and increasing call activity. The rally started in after hours Monday when the company reported a quarterly profit of 4 cents per share. Analysts were looking for a 1-cent loss. SONS also guided estimates up for the year. Shares gained $1.02 to $4.05. Options volume is 16X the average daily volume for Sonus, with 11,000 calls and 975 puts traded. March 3.5 calls are the most actives and included 200-contract lots at the 35-cent asking price in very early trading. The timing seems good so far. 5,429 March 3.5 calls have now traded and the contract is bid at 55 cents. The contract expires in 17 days. Sonus makes hardware that lets Internet and cable companies offer video and voice communication services to customers.

Alcoa (AA) is down $2.4 percent to $16.49 and the biggest loser in the Dow Jones Industrial Average through midday. Meanwhile, a noteworthy trade in the aluminum maker today is block of 19,000 October 15 calls at $2.73 per contract. The position was bought, according to a source on the exchange-floor. It was also tied to a large position in AA shares and therefore not a straight bullish bet, but possibly more of a volatility play in AA. A similar block traded in the January 15 calls.

Bearish Flow
Semiconductor HOLDRS (SMH) sees some sizeable put trades today. Shares hit a morning high of $36.07, but are now down 32 cents to $35.46. 25,000 puts and 4,130 calls traded in the name, which is twice the recent average daily volume. The top trade is a 9400-contract block of April 15 puts at 42 cents. It traded on the International Securities Exchange [ISE], where ISEE data indicate an investor bought the block and opened a new position. 15,000 traded total. May 35 puts are seeing interest as well. Some investors might be taking positions in SMH to play volatility in tech stocks. Chip stocks are historically among the more volatile sub-groups within the technology sector.

HSBC (HBC), which fell on disappointing earnings yesterday, is down another 3 percent to $53.42 today. Options action continues. 15,000 puts and 3,400 calls traded on the British banking giant so far. September 50 puts are the most actives. More than 5,000 traded. Open interest is 1,411 contracts. So, some investors might be taking new positions in these out-of-the-money puts and bracing for additional weakness in HBC from now through September. March and April 52.5 puts are the next most actives.

Unusual Volume
Petrohawk (HK) options volume is running 3.5X the (22-day) average, with 96,000 contracts traded and call volume accounting for 92 percent of the volume.

Weatherford (WFT) options volume is 5.5X the average daily, with 73,000 contracts traded and call volume representing for 99 percent of the activity.

Goldcorp (GG) options volume is running 2X the average daily, with 47,000 contracts traded and call volume accounting for 76 percent of the activity.

Increasing options activity is also being seen in Lorillard (LO), SPDR Homebuilder ETF (XHB), and YRC Worldwide (YRCW).

Implied Volatility Mover
Lorillard (LO) shares are seeing relative strength and options are busy after the FDA said that menthol does not pose higher risk to smokers. Shares of the cigarette maker are up $1.59 to $78.35. Options volume is almost 5X the average daily. Meanwhile implied volatility is down 12 percent to 52, now that this event risk has passed.