Market Waits for Obama's Speech on Deficit 04-13-2011

Cusick's Corner
In action overnight -- the Nikkei was very strong, plus earnings solid -- JPM beats. This supports the bulls at this stage but the market is waiting to hear the President's outline for the budget. One thing that the markets will be listening for is tax code changes, specifically raising taxes on dividends. This has the potential to shake the market's confidence and would take the potential of a buy on the dip mentality. With the Dollar dropping, coupled with Oil drops and the market pulling back, let's see if the bid rises after the President speaks. See you After Hours.

Stocks are trading mixed after a morning of relatively quiet trading on Wall Street Wednesday. Economic data was in focus early after a report showed Retail Sales up .4 percent in March, which was .1 percent less than expected. Meanwhile, Business Inventories rose .5 percent in February, which was also below expectations of .8 percent. On the earnings front, Dow component JP Morgan (JPM) reported a quarterly profit of $1.28 per share, which was twelve cents better than Street estimates. Although shares traded higher on the results Wednesday morning, JPM is now down .8 percent and one of 16 Dow stocks showing a loss on the session. Fourteen Dow stocks are higher and the Industrial Average is down 3 points at midday. The tech-heavy NASDAQ has added 8.4. Overall options volume is running about the typical levels, with 4.6 million calls and 3.8 million puts traded through 12:30pm ET.

Bullish Flow
Yahoo (YHOO) shares have added 23 cents to $16.59 and early options action Wednesday included some bullish call spreads on the Internet search giant. In this trade, the investor apparently bought 4,000 July 15 calls at $2.12 and sold 4,000 July 19 calls at 50 cents. The spread traded for a net debit of $1.62 and is a bullish play, as it makes its best profits if shares move to $19 or more by the July options expiration. The spread traded almost 6,000X in early action and might be a play on earnings, which are due out on the afternoon of April 19.

Alcoa (AA) shares lost 6 percent on earnings news yesterday and are down another 24 cents to $16.46. Meanwhile, in options trading, one investor bought 13,000 April 18 puts at $1.26 and sold 13,000 May 18 puts at $1.44. The spread, for a net credit of 18 cent, is probably a roll. That is, the investor is buying back the 18s before the expiration at the end of the week. Since the contract is in-the-money, the contract will get assigned if it's not closed out. The strategist is also selling-to-open a new position in the May 18 puts, perhaps betting that AA will recover recent losses and move back beyond $18 per share.

Bearish Flow
CBOE Volatility Index (.VIX) has added .07 to 17.16 and the May and June 20 calls on the VIX are the most actively traded options contracts so far today. More than 100,000 traded in each. The action includes a May - June 30 call spread at 20 cents, 45000X. In this trade, the investor might be closing out a bullish position in VIX May 30 calls and opening a new one in the June 30s. Since the contract is almost 75 percent out-of-the-money, they might be looking for a big jump for the index through mid-June. It's not a bearish play on the VIX. It reflects expectations for heightened volatility, which is only likely to happen if the broader market makes a significant move lower.

Citigroup (C) loses 6 cents to $4.50 today and one investor sells the September 4.5 - 5 call spread at 18 cents to buy the September 4 puts at 13 cents, 45000X. This three-way spread, for a net credit of a nickel, is a bearish play, but is also probably a closing position. On March 17, the same spread traded at even multiple times. At that time, the September 4 puts were being sold at 21 cents to buy the September 4.5 - 5 call spread at 21 cents. The investor is possibly banking the profit now rather than run the risk of holding the position through an April 18 earnings report.

Unusual Volume
Tyco International (TYC) options volume is running 12X the (22-day) average, with 152,000 contracts traded and call volume accounting for about 80 percent of trades.

MGM options volume is 3X the average daily, with 101,000 contracts traded and call volume representing for 77 percent of the activity.

Riverbed Tech (RVBD) options volume is running 2X the average daily, with 40,000 contracts traded and call volume accounting for 60 percent of the activity.

Increasing options activity is also being seen in Big Lots (BIG), Community Healthcare (CYH), and Yum Brands (YUM).

Implied Volatility Mover
MGM is trading higher and implied volatility is higher after the casino operator announced an agreement related to a proposed IPO of its Macau Joint Venture. Shares gained 98 cents to $13.59 and options volume is heavy. 77,000 calls and 24,000 puts traded. April 14 calls and April 13 puts, which expire at the end of the week and are both out-of-the-money, are the most actives. Meanwhile, implied volatility in MGM options has jumped about 9 .5 percent to 46.