Market Waits for First Round of Earnings 04-11-2011

Cusick's Corner
This is the week that the market gets to focus on corporate earnings (with some high expectations) and not on headlines like the EU debt crisis or tectonic shifts in Asia. This does not mean that the prospect of market volatility has increased -- as you can see from the anemic volume, the only player who is benefiting from this type of choppy, low volume action is the intraday trader who is flat at the end of a session. The market is just feeling too complacent, VIX at 16.86, and no conviction in the short-term (low volume). If volatility or volume hit this market, volatility strategies may be in play - straddles & strangles may potentially fit with the earnings schedule that is on tap for the remainder of the month. Commodities are the segment that most traders are focused on - but be careful in the silver markets, SLV, this is a low volume, high flying market that is prone to some serious moves. See you After Hours.

Stocks are trading mixed, as investors brace for the first round of first-quarter earnings reports. Alcoa (AA) unofficially kicks things off after the closing bell today. However, the floodgate on first quarter earnings doesn't really open until next week. The tone of trading has a wait-and-see feel ahead of the reports. In addition, there hasn't been much news to guide trading Monday. On the economic front, there's nothing on the calendar until Trade Balance and Import/Export price data Tuesday morning. The stock news is light as well. A couple of smaller deals were announced after Level 3 said it was buying Global Crossing and Endo Pharmaceuticals made a move for American Medical. Meanwhile, Traveler's (TRV) is up 2 percent and the helping the Dow Jones Industrial Average to a 40-point midday gain. However, the NASDAQ is down 4.6 points. The CBOE Volatility Index (.VIX) lost 1.15 to 16.72. Overall options volume remains light, but will probably pick up later this week ahead of the expiration. 3.6 million calls and 3.3 million puts traded through 12:30pm ET.

Bullish Flow
Yahoo (YHOO) shares are trading down 17 cents to $16.60 and today's call options volume is impressive, with 84,000 contracts traded. The volume 3X the typical and compares to 12,000 puts traded. April 17 and May 18 calls have both traded more than 20,000 contracts and the action includes some spread trading. In these diagonal spreads, one or more investors have been selling April 17 calls and also buying the May 18s. The April 17s are 40 cents, or 2.4 percent, out-of-the-money, and expire at the end of the week. These investors might be closing out the position in order to avoid the risk of seeing the calls expire worthless. However, they are also opening new bullish positions in the May calls with the higher strike price. Basically, they are buying an additional month for the trade to play out. Yahoo May 17, January 20, and January 25 calls are seeing brisk trading today as well.

Tyco International (TYC) shares touched a new 52-week high today and are up $1.58 to $48.73. Options action is brisk. 17,000 calls and 3,135 puts traded in the name. May 50 calls are the most actives. 3,400 traded. April 50, May 55, July 50 and July 55 calls are seeing brisk trading as well. There's takeover chatter in Tyco today. It's unsubstantiated market talk, but seems to be the catalyst for the relative strength in the stock and the increased call activity Monday.

Bearish Flow
Community Health (CYH) is reeling after Tenet Healthcare (THC) filed a lawsuit alleging the company overstated growth statistics with inflated admissions. Shares are down $13.80 to $26.50 and trading in the options market has been brisk as well. 19,000 puts and 15,000 calls traded. Typical volume in CYH is about 400 contracts. April 30 call options are the most actives. 5,670 contracts traded. 60 percent hit on the bid, as it appears that some investors are betting that the stock won't recover beyond $30 by the end of the week. April 30 and 34 puts are the next most actives.

An unusual trade surfaced in the iShares Silver Fund (SLV) Monday morning. Shares touched a new 52-week high early, but have since given back the gains and are down 21 cents to $39.65. May Silver approached $42, but is now up 10 cents to $40.71. Meanwhile, a noteworthy trade in SLV, which is an exchange-traded fund that holds the metal, is a buyer of 100,000 July 25 puts at 10 cents each. It's very unusual because the calls are so deep out-of-the-money. A move to $25 represents a 38.6 percent plunge in the SLV fund.

Unusual Volume
Oil Service HOLDRS (OIH) options volume is running 3X the (22-day) average, with 78,000 contracts traded and put volume accounting for about 59 percent of trades.

Tenet Healthcare (THC) options volume is 15X the average daily, with 67,000 contracts traded and put volume representing for 54 percent of the activity.

TEVA options volume is running 2.5X the average daily, with 46,000 contracts traded and call volume accounting for 63 percent of the activity.

Increasing options activity is also being seen in Expedia (EXPE), Community Healthcare (CY), and BJ Wholesale (BJ)

Implied Volatility Mover
Tenet Healthcare (THC) is under pressure after the company filed a lawsuit against Community Healthcare (See Bearish above). The news triggered volatile reaction on both stocks. THC shares are down 16 percent to $6.34. Meanwhile, options volume includes 30,000 calls and 36,000 puts, which is 15X typical volume for THC. Implied volatility in the options has surged 83 percent to 58.