Defense, Defense 05-03-2011

Cusick's Corner
Defense is in play. The VIX continues higher, 3 up days in a row, Financials (XLF) and Tech (QQQQ) lag and are now well behind Consumer Staples (XLP) and Healthcare (XLV). There's been a rush to Consumer Staples like toothpaste, beverages, soap, and Drugs (not the illegal kind!), makers/distributors, are outperforming the offensive sectors, especially when there's uncertainty on employment and domestic and global GDP growth. This might be a short-term pullback (not totally unhealthy) but this will wash out the weak hands. Out-of-the-money put butterflies are trading (check out Bearish Flow), indicating to me that there are strategists who see high implied volatility and a potential pullback. As a matter of fact, the SPY trade would have full profit if the SPY would pull back 7.4% and that level is the March low and the bottom where the head of the inverse head and shoulders that I spoke about last week formed. See you After Hours.

Stocks are trading mixed, as weakness in the commodities markets and unimpressive earnings outweighed a better-than-expected report on Factory Orders. Crude oil is down $1.09 to $112.43 a barrel and gold gave up $14.1 to $1,543 an ounce. Consequently, Exxon Mobile (XOM) and Chevron (CVX) are among the Dow's losers through midday. Pfizer (PFE) lost 2.2 percent and is the largest decliner in the industrial average after its earnings failed to live up to Street expectations. Clorox (CLX) and Molson Coors (TAP) are also seeing post-earnings weakness. On the economic front, the only economic stat of the day showed Factory Orders up 3 percent in March, which was much better than the 1.8 percent that economists were expecting. Still, the overall tone of trading remains cautious ahead of key jobs data later this week. While the Dow Jones Industrial Average is up 22 points, the tech-heavy NASDAQ has given up 20.5. The CBOE Volatility Index (.VIX) gained .34 to 16.33. Overall options activity is picking up, with 6.9 million calls and 4.2million puts traded through 12:30pm ET.

Bullish Flow
Alcoa (AA) has seen a surge in options activity today. Shares are up 2.7 percent to $17.70 and the best gainer in the Dow Jones Industrial Average. Meanwhile, options volume includes 289,000 calls and 65,000 puts. The May 18 calls, which are 1.7 percent out-of-the-money, are the most actives. 50,000 contracts traded. May 19 and May 20 calls are seeing brisk trading. A Reuters story out Tuesday morning attributes the increased call activity to speculation that Rio Tinto might bid for the aluminum maker. The article notes that sources at two banks said to be financing the deal have denied the speculation. Still, trading in AA calls is brisk in reaction to takeover chatter.

Sirius XM Radio (SIRI) touched a new 52-week high today and is up 17 cents to $2.08 after the company posted a quarterly profit of a penny per share, which was in-line with analyst estimates. In options trading, volume is 4X the recent average daily. 59,000 calls and 7,700 puts have traded in the name so far. June 2 calls, which are now 8 cents in-the-money, are the most actives. 13,940 traded. May 2, June 2, January 1, and January 2 calls are seeing interest as well.

Bearish Flow
SPDR 500 Trust (SPY) loses 43 cents to $135.79 and a noteworthy spread traded in the ETF today. In this trade, the investor sold 42,000 June 125 puts at 60 cents. They also bought 21,000 June 130 puts at $1.21 and bought 21,000 June 120 puts at 34 cents. In other words, they bought the June 120 - 125 - 130 put butterfly spread at 35 cents, 21000X. The spread has traded more than once today. It's a bearish play or perhaps hedging activity. The spread offers a max pay-off if shares fall to $125 through the June expiration, which represents an 8 percent decline in the S&P 500 over the next 45 days.

Silver Wheaton (SLW) shares are down 38 cents to $37.40 after silver tumbled $3.35 to $42.74 an ounce Tuesday. Meanwhile, 56,000 calls and 21,000 puts traded in the Vancouver-based silver miner. January 40 calls, which are now 7 percent out-of-the-money, are the most actives. 4,870 traded and, with 75 percent traded on the bid, it looks like call writers are dominating the trade. Some investors might be sell-to-close positions on the weakness in SLW shares today.

Unusual Volume
SPDR Basic Materials (XLB) options volume is running 3X the (22-day) average, with 66,000 contracts traded and put volume accounting for about 98 percent of trades.

Sirius XM Satellite Radio (SIRI) options volume is 3.5X the average daily, with 59,000 contracts traded and call volume representing for 88 percent of the activity.

Eli Lilly (LLY) options volume is running 2.5X the average daily, with 29,000 contracts traded and call volume accounting for 80 percent of the activity.

Increasing options activity is also being seen in Xerox (XRX), Alpha Natural Resources (ANR), and Career Education (CECO).

Implied Volatility Mover
Longtop Financial (LFT) implied volatility is moving higher, as the stock is back under pressure today. Shares, which lost 45.5 percent from April 7 through April 27, are down $2.35 to $20.05. Meanwhile, options action includes 6,530 puts and 1,790 calls. May 20 puts, which are now at-the-money, are the most actives. 1,200 traded. Meanwhile, implied volatility is up 9 percent to 117. The stock was the subject of a negative research report last week and hit a low of $16.7 Wednesday.