Red Flag – Copper Pulling Back 03-30-2011

Cusick's Corner
The bulls are on the loose and I am not one to get in front of a raging bull. Big Money, those managers who washed their hands of this market 10 sessions ago are feeling enough remorse and are back in, more so than the typical window dressing that we typically we see at month's end. This action looks and feels like it could stick around for the next couple of weeks. Keep an eye on Copper (JJC). As I mentioned earlier in the week, the metal has begun to pull back and that's a potential red flag. See you After Hours.

Stock market averages are holding gains with help from jobs data and deal news. ADP reported Wednesday morning that the US economy added 201,000 private sector jobs during the month of March. While the number was slightly less than the 210,000 that economists were expecting, the number was not too far off the mark and comes ahead of key jobs data from the Labor Department. Similarly, economists expect Friday's report to show the economy creating about 200,000 jobs. Meanwhile, the biotechnology sector is in focus after Valeant Pharmaceuticals (VRX) made an unsolicited $5.7 billion bid for Cephalon (CEPH). Steady trading across the commodities and overseas markets helped keep the rally on Wall Street alive as well. The Dow Jones Industrial Average is up for the eighth time in ten days and has added 89 points through midday. The tech-heavy NASDAQ gained 19.5. The CBOE Volatility Index (.VIX) lost another .72 to 17.44. Overall options volume is picking up from a very slow pace seen Monday and Tuesday, with 4.8 million calls and 3.7 million puts traded through 12:45pm ET.

Bullish Flow
Options action is picking up in Mosaic (MOS) ahead of earnings. Shares are up $1.15 to $80 and total options volume includes 21,000 calls/6,000 puts. While some speculators are active in the April 80 and 85 calls, June call options are the most actives. The action includes June 85 calls at the $3.80 asking price in morning trading. Some investors seemed to be taking positions in the June 85 – 100 call spread as well. The June 85 call options have now traded 4,500 contracts. The relative strength in the stock and increasing call volume seems to reflect expectations for an upbeat earnings report. Mosaic releases results after the closing bell.

Clean Energy Fuels (CLNE) shares are up $1.47 to $16.40 after T Boone Pickens apparently told reporters that he expects the NAT GAS act to pass the House of Representatives. The act would give buyers of natural gas powered vehicles tax credits. Pickens is the founder of CLNE, which is a provider of natural gas to vehicle fleets. Shares are rallying on the news and total options volume is 14,000 calls and 3,830 puts, which is 5X the average daily for Clean Energy Fuels. April 15 calls, which are now $1.40 in-the-money, are the most actives. 2,475 traded. April 16, 17 and 18 calls are busy as well.

Bearish Flow
An interesting three way spread trades in the CurrencyShares Euro ETF (FXE). Shares, which track the Euro/US Dollar currency pair (X100), have battled back from morning losses and are now trading up 19 cents to $140.88. Meanwhile, in options action, on investor sold 3,000 May 142 calls at $1.30 per contract and bought 3,000 May 139 – 135 put spreads at $1.08. They basically sold out-of-the-money calls to buy the put spread and collected a 22-cent credit on the package. It's a bearish play on the euro, with added risk to the upside because the May 142 calls are not covered.

One of the top equity options trades so far today is in General Electric (GE), which is up 31 cents to $20.17 and one of twenty-seven Dow stocks moving higher Wednesday. In midday action, a block of 15,000 GE June 21 puts traded at the $1.48 asking price. The contract is 83 cents in-the-money and open interest is 15,065. This might be a closing trade or if it's opening, possibly an outright bearish bet on GE. On the other hand, a shareholder might have initiated the trade to protect a position in shares.

Unusual Volume
AT&T (T) options volume is running 3X the (22-day) average, with 144,000 contracts traded and call volume accounting for about 68 percent of trades.

Cephalon (CEPH) options volume is 47X the average daily, with 87,000 contracts traded and put volume representing for 54 percent of the activity.

Visa (V) options volume is running 4X the average daily, with 83,000 contracts traded and call volume accounting for 59 percent of the activity.

Increasing options activity is also being seen in AMR, Devon Energy (DVN), and Radioshack (RSH).

Implied Volatility Mover
Cephalon (CEPH) is rallying and implied volatility is falling after Valeant Pharmaceuticals (VRX) made a $5.7 billion bid for the biotech. Shares are up 28 percent to $75.34 and trading in the options market is heavy. 40,000 calls and 47,000 puts traded in CEPH so far. Some investors are likely selling premium on the view the stock will stay in range now that a merger has been announced. For example, the top trade of the day appears to be an April 70-65 put spread sold at 20 cents. Meanwhile, implied volatility is down 12.5 percent to 20.5 and new 52-week lows.