Longs & Shorts Draw Battle Lines 03-09-2011

Cusick's Corner
Trader psyche is in question, but the action in the market is not. Trader exuberance, aggressively buying dips and pouring capital into Risk, has moderated but prices continue to hold or go higher. There are true battle lines being drawn -- the shorts are defining the 1330 level as their territory and the longs 1300 (I track the S&P front month Futures). If the 50-Day Moving Average is broken then the market shorts could build on their momentum and the longs could squeeze the shorts if the ceiling of 1330 is broken, potentially fueling the upside again. See you After Hours.

Stocks are trading mixed and the underlying tone remains cautious Wednesday, but without much new information to guide the action. A lot of the focus remains on crude oil, with WTI April Crude flat around $105 a barrel on reports Libyan forces hit storage tanks at terminal town Es Sider. Meanwhile, the economic calendar remains light. A report released at 10:00am ET showed Wholesale Inventories up 1.1 percent in January, which was in-line with expectations. The data didn't make any waves on Wall Street. Instead, the focus is on oil and events overseas. The Dow Jones Industrial Average has added 20 points, but tech-heavy NASDAQ lost 11. The CBOE Volatility Index (.VIX) edged up .06 to 19.88. Overall options volume is running about the typical levels, with 4.6 million calls and 3.5 million puts traded through 12:30pm ET.

Bullish Flow
IBM shares gained 2.7 percent to $166.73 and are helping to keep the Dow Jones Industrial Average above water through midday Wednesday. IBM is one of 13 Dow stocks moving higher after analysts raised the price target on the stock following the company's analyst meeting yesterday. The stock is notching fresh 52-week highs and today's options volume includes 44,000 calls and 35,000 puts. March 165 puts and 170 calls are the most actives, with some players likely bracing for additional volatility in the stock over the next week and a half. March options expire at the end of next week.

Coinstar (CSTR) shares fell yesterday after Warner Brothers said it would begin renting and selling movies on Facebook. Coinstar operates RedBox DVD rental machines. Shares are up 71 cents to $42.89 today, however, on reports the company is making a deal with Walmart. It's unconfirmed, but the speculation seems to be the catalyst for the gains in the stock price and increasing call activity in CSTR today. March 45 calls have traded 1,054 contracts and are the most actives. March 47.5 and 50 calls are seeing interest as well.

Bearish Flow
Lam Research (LRCX), a Fremont, CA semiconductor equipment company, is trading down $3.36 to $54.48 and options volume is running 3X the average daily on a day of relative weakness in the sector (XLNX, ALTR, MU also lower). Meanwhile, options volume in LRCX includes 3,690 puts and 560 calls. Looks like some investors are bracing for additional downside in LRCX June 50 puts, which are 8.2 percent out-of-the-money. 2,470 contracts trade so far.

Technology Select Sector ETF (XLK), which holds all of the technology-related names from the S&P 500, is trading down 13 cents to $26.17 and morning trades included XLK April 26 – 27 call spreads. The spread traded at 43 cents, 2900X about 12 minutes into the trading session. 10000 traded total and, in this spread, it appears that the 26 calls were sold and the 27s bought to open new positions. If so, it's probably a bet that shares will hold below $26 through the April expiration in 38 days. The breakeven, excluding commissions, is at $26.43.

Unusual Volume
IBM options volume is running 2.5X the (22-day) average, with 74,000 contracts traded and call volume accounting for 56 percent of the volume.

Finisar (FNSR) options volume is 6X the average daily, with 48,000 contracts traded and call volume representing for 52 percent of the activity.

Cheniere Energy (LNG) options volume is running 5X the average daily, with 46,000 contracts traded and call volume accounting for 70 percent of the activity.

Increasing options activity is also being seen in Exelon (EXC), Human Genome Sciences (HGSI), and Xilinx (XLNX).

Implied Volatility Mover
Exelon (EXC) is seeing relative strength and increasing options activity today. It's not clear if any news item is driving the action, but the stock is up 2.5 percent to $43 and options volume is 9X the average daily. 17,000 calls and 15,000 puts traded in the Chicago-based diversified utility so far. Meanwhile, implied volatility is up 6 percent to 16.5.