Slow Grind Squeezes Shorts 03-03-2011

Cusick's Corner
Dollar weak, Oil stable (for now) and the rest of the world readying to fight inflation -- the market is up across the board. The data both domestically and internationally is coming in better than expected, ramping up expectations of further upticks in employment and economic growth. So tides have changed in two days, and as I have said in the past, the trend is your friend and you do not want to fight this trend. Sentiment is clearly on the side of the bulls, Put/Call Ratio at .89 and the VIX is 18.65 which is 17% lower than the Wednesday high of 23. See you After Hours.

Stocks are broadly higher with help from economic data and falling crude oil prices. Date released before the opening bell on Wall Street Thursday showed jobless claims falling by 20,000 to 368,000 in the final week of February. Economists were looking for an increase of 12,000. The number holds a bit more sway than usual, as it comes ahead of key monthly jobs numbers tomorrow morning. Separate data released later included the ISM Services Index, which moved up to 59.7 in February, from 59.4 the month before and better than the 59.0 that economists had predicted. Meanwhile, crude oil, which has been the source of considerable investor angst lately, is trading down $1.85 to $100.38 a barrel. The better-than-expected data and falling crude seemed to have offered enough fodder for the bulls and the Dow Jones Industrial Average is up 178 points at midday. The NASDAQ has added more than 50. The CBOE Volatility Index (.VIX) gave up 2.10 to 18.60. Overall options volume is a bit more active than Wednesday, with 4.9 million calls and 3.8 million puts traded through 12:30pm ET.

Bullish Flow
Valero (VLO), the San Antonio, TX oil refiner, is trading up $1.95 to $28.85 and options order flow through midday includes 53,000 calls along with 15,000 puts. The top trade is a buyer of 15,000 January 2013 calls at the 14 strike. This looks like a new position. It was tied to 435,000 shares, according to a source on the floor, and is therefore not a straight bullish trade. Still, it seems to reflect expectations for a rally in VLO through January 2013. The Jan2013 $30 calls are seeing interest well, with more than 10,000 traded.

Chiquita Brands (CQB) shares are trading down 32 cents to $15.23 in volatile post-earnings trading. Yet, while shares are reeling, the options order flow seems a bit more bullish. Total volume is 5X the average daily. 4,385 calls and 600 puts traded in the name. May 15 calls are the most actives and includes morning buyers paying $1.60 to $1.70 per contract. Total volume is now 3,280 and the market is now $1.50 to $1.70.

Bearish Flow
Delta Airlines (DAL) shares are trading up 12 cents to $10.27 and trying to recover from a two-day 9.7 percent skid. Airliners have been under pressure lately due to fears about the rising impact of crude oil on jet fuel costs. Meanwhile, options volume in Delta today is 2X the average daily. 25000 puts and 12000 calls traded in the name. The top trade of the day is a January – January 2013 put spread at 43 cents, 10000X. In this spread, the strategist bought 10,000 January $5 puts that expire in 2013 and sold 10,000 January 2012 $5 puts. They might be looking for shares to drift lower through 2012 and then fall below $5 into the January2013 expiration.

Franklin Resources (BEN), a San Mateo, CA asset manager, is trading up $3.31 to $127 per share. Meanwhile, options volume today includes 4,570 puts and 220 calls. The action is concentrated in April 120 puts, which have traded 3,560X. The contract is $7 out-of-the-money with 43 days of life remaining. Some investors might be buying these puts and looking to protect recent gains. Shares are up 15.2 percent over the past two months.

Unusual Volume
Powershares Bullish Dollar Fund (UUP) options volume is running 2.5X the (22-day) average, with 77,000 contracts traded and call volume accounting for 60 percent of the volume.

Bristol Myers (BMY) options volume is 3X the average daily, with 53,000 contracts traded and call volume representing for 67 percent of the activity.

Flextronics (FLEX) options volume is running 40X the average daily, with 51,000 contracts traded and call volume accounting for 51 percent of the activity.

Increasing options activity is also being seen in Metlife (MET), AMR, and Bristol Myers (BMY).

Implied Volatility Mover
Bristol Myers (BMY) implied volatility has been moving higher. Shares are up 53 cents to $25.92 and today's options volume of 36000 calls and 17000 puts is 3X the 22-day average volume for the medical device maker. Meanwhile, implied volatility is up 9 percent to 23.5 and now up 24 percent since mid-February. There's no news on the stock, but the increasing volume and higher implied volatility seems to reflect expectations for larger-than-typical move in the share price in the days/weeks ahead.