Bears Stop for a Pic-a-Nic 06-17-2011

Cusick's Corner
The market is now just off its best levels but for the most part we are seeing a market bounce on positive headlines and the shorts are stepping aside at this stage. Now this can be expected to happen over the next few sessions, especially since the market just was brutalized over the last 2 days. Expiration has been orderly and the sentiment has not shifted away from the bearish camp. The market has held critical support on the 200-Day Moving Average, plus has set up the potential for a grind up for the moment. However, this market is fragile (at least the market psyche is) and with the data mixed, we could be a headline away to further downside risk in equities. See you After Hours.

Stock market averages are higher, but well off their best levels on options expiration Friday. The tone of trading turned a bit more upbeat on Wall Street after European markets moved higher on news Germany and France have agreed on terms to help debt-ridden Greece. The euro recaptured .8 percent against the dollar. The domestic economic news was mixed. The University of Michigan reported that its index of consumer sentiment declined to 71.8 in June, from 74.3 at the end of May. Economists were expecting an increase to 74.5. However, the latest list of leading indicators for May showed an increase of .8 percent, which was better than the .2 percent that was expected. Action in the commodities market is mixed. Crude oil is down $2.11 to $92.84 per barrel, but gold gained $10 to $1,539.90 an ounce. Meanwhile, the Dow Jones Industrial Average is holding a 61-point gain, but is now 50 points off session highs. The NASDAQ gained 3.5 points. CBOE Volatility Index (.VIX) lost 1.27 to 21.46 and trading is active due to the quadruple witch expiration, with 5.2 million calls and 5.6 million puts traded through 11:30 central time. Today is the last day to trade the June options contracts.

Bullish Flow
A notable trade surfaced in Freeport McMoran (FCX) early Friday. Shares of the gold and copper miner are down 11 cents to $47.74 and one investor sold 24,700 June 42 calls at $6.55. They also bought 24,700 July 43 calls at $6.20. So, they collected 35 cents on the spread, 24,700X. Both contracts are in-the-money and the spread was likely a roll. June options expire after today, and the investor was probably liquidating a winning position in the June 42s, but also opening a new similar position in the July calls, but up one strike price. July options expire in four weeks and the premium buyer is possibly looking for FCX shares to perform well during that time.

Southwest Airlines (LUV) is moving higher along with other airlines on diminishing concerns about the impact of jet fuel costs after crude oil prices fell to their lowest levels since February. Shares gained 23 cents to $11 and the bulk of the options activity in LUV is in the at-the-money July 11 call options. 7,393 traded, including morning trades at the 40-cent asking price. Since open interest is only 361 contacts, the activity looks opening and to reflect expectations that shares will continue to rally beyond $11 through the July expiration in four weeks from today.

Bearish Flow
Clearwire (CLWR) is down 9.5 percent to $3.44 and falling to new 52-week lows. Puts are actively traded in the network equipment company as well. One investor bought at 5,400-contract block of January 5 puts at $2.10 per contract. 6,110 now traded against open interest of 14,777. Meanwhile, another 1,300 December 2 puts traded, against 20 contracts of open interest. 8,070 puts and 570 calls now traded in the name. While some of the action might be closing, implied volatility is up 15 percent to 96 and some investors seem to be concerned about additional losses in the stock. Shares are down 33.2 percent year-to-date on concerns that it won't be able to secure cash to complete its communication network (Fortune).

Harbin Electric (HRBN) plummeted 51 percent yesterday on a negative research note. Shares are up 79 cents to $7.77 today and options action remains brisk. 17,000 calls and 16,000 puts traded in the Beijing electrical equipment company so far. July 5 puts are the most actives. 5,767 traded and roughly 60 percent traded at the ask. Open interest is 3,208. It looks like investors are paying $1.35 and $1.40 per contract and bracing for a possible move below $5 per share through the July expiration.

Unusual Volume
Harbin Electric (HRBN) options volume is running 5.5X the (22-day) average, with 90,000 contracts traded and put volume accounting for about half of trades.

Medivation (MDVN) options volume is 56X the average daily, with 41,000 contracts traded and call volume representing 100 percent of the activity.

Finisar (FNSR) options volume is running 4X the average daily, with 32,000 contracts traded and put volume accounting for 59 percent of the activity.

Increasing options activity is also being seen in Lorillard (LO), Computer Sciences (CSC), and Cemex (CX).

Implied Volatility Mover
Research In Motion (RIMM) shares tumbled $7.37 to $27.96 and fell to multi-year lows today after the company reported earnings. Although first quarter results topped expectations, revenues were light and the second quarter outlook was scaled back. RIM options are seeing heavy trading. 205,000 calls and 380,000 puts so far. Although options are heavily traded and shares are seeing a volatile reaction to the news, implied volatility in RIM options is down now that the event risk has passed. IV in RIMM options has fallen 20 percent to 51.5.