Merger Announced 03-21-2011

Cusick's Corner
Earlier this morning optionsXpress and The Charles Schwab Corporation announced that they agreed to merge. I am excited about the new offerings and opportunities that may come from this merger. With that said, M&A is on the rise (see Bullish Flow) and blue chips are under pressure (see Bearish Flow). Libya and Japan have more clarity but still very volatile. This means that the trend is back in the bull's corner, but do not become too complacent -- insurance is still something to consider. See you After Hours.

Stocks are broadly higher on deal news and decreasing worries about the Japanese nuke crisis. Telecomm stocks are in focus after AT&T (T) made a $39 billion bid for T-Mobile. Meanwhile, concerns about the fallout from the crisis in Japan eased somewhat Monday after the Nuclear Regulatory Commission said the situation at the Fukushima Dai-ichi plant appears to be improving. The only economic stat of the day was a bit disappointing. Existing Home Sales fell to an annual rate of 4.88 million in February, down from 5.4 million in January and below economist estimates of 5.05 million. Still, the Dow Jones Industrial Average rallied at the opening bell and was able to hold gains through midday Monday. The Dow is up 192 points and the tech-heavy NASDAQ added nearly 50. The CBOE Volatility Index (.VIX) is down 3.71 to 20.73. Trading in the options market is active and reflects the bullish underlying tone, with 5.1 million calls and 3.5 million puts traded through 12:00pm ET.

Bullish Flow
Sprint Nextel (S) is under pressure on news AT&T is taking out T-Mobile in a massive $39 billion deal. Sprint lost 81 cents to $4.25 in volatile trading. Meanwhile, 107,000 calls and 46,000 puts traded on the telephone company. The biggest trade of the day was a block of 30,000 May 5.5 calls bought this morning at 8 cents per contract, according to a source on the exchange floor. The contract is now $1.25, or almost 30 percent, out-of-the-money after today's drop in the stock price. An investor might have taken the bullish position on the view that today's sell-off in Sprint is an over-reaction.

Estee Lauder (EL) shares are trading up $2.28 to $91.63 on diminishing worries about the company's exposure to Japan. The company reaffirmed its 2011 forecast on Friday despite the issues in the Japanese economy. Meanwhile, in options action, a noteworthy trade today is a block of 6,800 puts at 90 cents. It was sold, according to a source on the exchange floor. 8,290 traded, which compares to 1,597 contracts in open interest. Investors might be selling these puts on the view shares will hold above $85 through the April expiration. If not, they'll be on the hook to buy the stock at $85 per share through April 16.

Bearish Flow
The top stock options trade so far today is in General Electric (GE). Shares have added 49 cents to $19.74 and a block of 40,000 September 12 puts was bought at 18 cents each. A similar position was opened Friday. Volume in the contract is now approaching 54,000 contracts. The action is unusual because these puts are almost 40-percent out-of-the-money. Moreover, GE has not traded for less than $12 since July 2009. The put purchase might be designed to hedge shares. It kind of looks like “disaster insurance”.

KBW Regional Banking ETF (KRE) is trading up 30 cents to $26.18 and options volume is 2.5X the average daily, being driven by blocks of April 26 puts. 6,778 traded at 69 cents and 1,778 at 68 cents. More than 10,000 have now traded and data indicate that customers are buying to open new positions. An investor looking to hedge exposure to the sector might have initiated the trades. Or, the put buying might be straight bearish bets on the regional banking group.

Suntrust (STI) options volume is running 3.5X the (22-day) average, with 23,000 contracts traded and call volume accounting for 71 percent of the volume.

Supervalu (SVU) options volume is 3X the average daily, with 19,000 contracts traded and put volume representing for 79 percent of the activity.

BJ Wholesale (BJ) options volume is running 3X the average daily, with 15,000 contracts traded and put volume accounting for 66 percent of the activity.

Increasing options activity is also being seen in Dillard's (DDS), Verigy (VRGY), and Estee Lauder (EL).

Implied Volatility Mover
The CBOE Volatility Index (.VIX) has plummeted in recent days. VIX is down 3.88 to 20.56 and has tumbled 33.7 percent from the levels seen Wednesday, when the volatility index jumped to multi-month highs of 31.78. The decline in the market's “fear gauge” reflects the sharp decline in risk perceptions and diminishing anxiety levels seen over the past few days. The panic has eased and, after very heavy trading last week, volume in the VIX pits is very light Monday. 76,000 calls and 43,000 puts traded on the volatility index so far.