TGIF 07-15-2011

Cusick's Corner
Stocks opened higher on positive corporate news while the Consumer Price Index [CPI] for June fell .2 percent which is twice as much as expected. The market averages are pretty flat right now as we wind down to the final hours on Expiration Friday. Google (GOOG) and Mattel (MAT) are up on earnings, while Clorox (CLX) and Petrohawk (HK) rallied on buyout news. Watch the Financials, XLF & KRE, they are taking a hit into the Midday and entering the After Hours which could bring some uncharacteristic volatility to this Expiration Friday. There will be more news coming out over the next few days as the debt talks continue in Washington, European Stress Test Results on banks are digested and earnings come even more into focus next week. See you After Hours.

On the economic front, today's news included the Consumer Price Index [CPI] for June, which fell .2 percent and twice as much as expected. Industrial Production rose .2 percent and in-line with expectations. On a down note, the latest NY Empire State Index fell to -3.76 in July. Economists were looking for the gauge of regional manufacturing activity to register an increase of 1.0. The latest consumer sentiment index from the University of Michigan was also weak. It's down to 63.8 in July, from 71.5 in late-June and much worse than the 71.4 that economists had expected. Still, earnings and deal news seem to be overshadowing the poor manufacturing and consumer sentiment data. The Dow Jones Industrial Average is up 10 points and the tech-heavy NASDAQ added 18. CBOE Volatility Index (.VIX) edged up .10 to 20.90. Trading in the options market is active due to the expiration with 4.4 million calls and 4.1 million puts traded through 11:50am ET. Today is the last day to trade July options.

Bullish Flow
A lot of the market action today is due to rolling activity ahead of the expiration. Investors are closing out July options positions which stop trading today and expire tomorrow morning, while opening new positions in other expiration months. Medivation (MDVN) is an example. Shares of the San Francisco, CA biotech are trading up 14 cents to $22.03 and one investor sold 19,800 July 13 calls at $9.05 and bought 19,800 August 13 calls at $9.575. The contracts are deep in-the-money and the investor is likely closing out the July 13s to avoid automatic exercise on the contract. At the same time, they are opening a new position in August to maintain a bullish position in MDVN.

Hess Corp. (HES) is rallying and options on the New York-based oil and gas company are active today after a fire on its 64 percent-owned Valhall oil platform was extinguished. Shares came under pressure Wednesday on news of the fire. Today, however, HES is up $2.50 to $72.14 and options volume includes 13,000 calls and 9,670 puts. The top trades appear to be part of a bullish combo, in which the investor bought 2,500 January 72.5 calls at $6.30 and sold 2,500 January 67.5 puts at $5.325. Therefore, they paid 97.5 cents for the combo and appear to be opening a new position in anticipation of additional strength in HES through January 2012.

Bearish Flow
MBIA (MBI) shares jumped 9.2 percent yesterday on news the company had settled a mortgage case with Bank of America (BAC). The stock is up another 9 cents to $10.11 today and has rallied more than 30 percent since late-June. Meanwhile in MBI options trading, today's volume is 28,000 puts and 12,000 calls. The top trades are part of a spread in which the investor bought 10,000 August 9 puts on the surety and title insurance company at 51 cents per contract and sold 10,000 August 8 puts at 22 cents. This spread traded for a net debit of 29 cents and is a bearish play. It makes its best profits if shares fall to $8 through the expiration. A shareholder might have initiated the position to protect recent gains in MBI.

An interesting spread trades in the SPDR 500 Trust (SPY) today. Shares are up 40 cents to $131.33 and one investor was focused on the Weekly puts that expire in one week on July 22nd. In this spread, they apparently bought 10,000 Weekly 129 puts at 76 cents and sold 10,000 Weekly 125 puts at 27 cents. So, 49 cents was paid for the spread. Since volume exceeds open interest in both contracts, this looks like new positioning and a bet that the S&P 500 will drift lower next week. Excluding commissions, the breakeven at the expiration is at $128.51, or about 2.1 percent below current levels.

Unusual Volume
Petrohawk (HK) options volume is running 9X the (22-day) average, with 128,000 contracts traded and call activity accounting for 94 percent of the volume.

Chesapeake (CHK) options volume is 2.5X the average daily, with 70,000 contracts traded and call volume representing 80 percent of the activity.

Medivation (MDVN) options volume is running 12.5X the average daily, with 40,000 contracts traded and call volume representing 99 percent of the total volume.

Increasing options activity is also being seen in Clorox (CLX), MBIA (MBI) and Sandridge (SD).

Implied Volatility Mover
Southwest Energy (SWN) is rallying and implied volatility in SWN options is moving higher. The oil and gas space is in the spotlight today after BHP made a bid for Petrowawk (HK), sending HK shares surging 62.5 percent. Meanwhile, SWN hit a new 52-week high and is up $3.25 to $46.92 midday. Options volume is 6.5X the average daily. 20,000 calls and 11,000 puts traded in the name. Heavy trading in the options has implied volatility in SWN up about 8 percent to 62.5.