Chop & Pop 07-20-2011

Cusick's Corner
This market pops on bad news, chop and then pop in spite of negative sentiment for fear of missing the next leg up. This is the grinding, choppy segment after the poor data and continued debt fears here and across the Pond. So what to do? Well volatility has pulled back this week to 19 and the market has a bullish direction in spite of the bearish sentiment early in the week with Put/Call ratio over 1. So we could look at potentially buying bull call vertical spreads. Buying at-the-money calls and selling out-of-the-money calls mitigates the time decay and volatility that is associated with buying options outright but you do give up the unlimited upside involved with the buying long calls alone. With a bullish sentiment in a low implied volatility environment, vertical bull call spreads could be the strategy of choice. See you After Hours.

Stocks are trading mixed Wednesday morning. Market averages moved higher in morning action with help from a round of positive earnings announcements. Apple Computer (AAPL) is up 3.1 percent after its latest profit report easily beat Street estimates. Textron (TXT), ST Jude Medical (STJ), and VMWare (VMW) are also up on profit news. However, United Technologies (UTX) lost 2.7 percent and is the biggest loser in the Dow Jones Industrial Average after its earnings fell short of some expectations. Still, the latest round of earnings was mostly upbeat and, after European equity markets traded higher for a third day, the table was set for morning gains on Wall Street. However, the rally ran out of steam around 10:00am ET when the latest Existing Home Sales numbers were released. The data showed a decline to an annual rate of 4.77 million for June, from 4.81 million the month before and short of the 4.93 million that economists had expected. The Dow Jones Industrial Average moved lower on the news and is now down 4 points. The tech-heavy NASDAQ also erased early gains and is off 8 points. CBOE Volatility Index (.VIX) edged up .03 to 19.24. Trading in the options market is running about the typical levels, with 3.8 million calls and 2.8 million puts traded through 11:30am ET.

Bullish Flow
Options on Pulte Group (PHM) are busy for a second day. Shares gained 3.5 percent yesterday after data showed a surprise jump in June Housing Starts. 10,000 calls and 32,000 puts traded in PHM yesterday, including a seller of 30,600 August 7 puts at 29 cents per contract. Today, shares drifted back down a nickel to $7.13 after the latest Existing Homes Sales data fell short of expectations. Another 9,715 calls and 640 puts traded on the homebuilder. January 9 calls, which are 26.2 percent out-of-the-money, are the most actives. 6,440 traded and 91 percent hit at the ask, suggesting buying interest. Some investors might be buying these calls on the view that PHM will recover some of its recent losses in the months ahead. The stock is down 15.5 percent since May.

SPDR Gold Trust (GLD), which holds the precious metal stored in bank vaults, is up 92 cents to $155.58 per share today. In morning options action, one investor initiated a sizeable spread on the ETF. They bought 20,000 August 162 calls at 82 cents and sold 20,000 August 171 calls at 18 cents. In other words, they bought the Aug 162 - 171 call spread for a 64-cent net debit, 20000X. The breakeven on this spread at expiration is at $162.64 (excluding commissions), which represents a 4.5 percent advance over the next 30 days. The potential pay-off is $8.36 if shares rally beyond $171, or almost 10 percent above current levels.

Bearish Flow
Zhongpin (HOGS) shares are down and put volume is picking up in the Chinese meat producer today. HOGS is running 8.1 percent lower to $8.58 after an article on the Seeking Alpha blog suggested that the company is overstating the scope of its business. HOGS is on a three-day 23.5 percent losing streak. Meanwhile, investors are bracing for further fallout and trading puts in the name today. August 5s, which are 41.7 percent out-of-the-money and expiring in 30 days, are the most actives. 2,547 traded. August 7.5 puts and even the deep OTM August 2.5 puts are seeing interest as well.

Whirlpool (WHR) options are seeing a second day of interest. As noted in yesterday's midday report, August 72.5 puts, August 67.5 puts, and August 70 puts on Whirlpool were busy Tuesday. Shares are up 33 cents to $75.40 today and the action continues. 5,500 puts and 1,050 calls traded on the appliance maker today. August 70 puts, which are now 7.2 percent out-of-the-money, are the most actives. 4,554 traded and, with 93 percent hitting at the ask, it appears that buyers are taking positions. August 67.5 and 70 puts are also seeing interest, as are the August 70 calls on Whirlpool. The increased option trading might be hedging activity ahead of earnings. The company is due to report tomorrow morning.

Unusual Volume
Riverbed Technologies (RVBD) options volume is running 3.5X the (22-day) average, with 42,000 contracts traded and call activity accounting for 52 percent of the volume.

F5 Networks (FFIV) options volume is 2X the average daily, with 35,000 contracts traded and call volume representing 50 percent of the activity.

Clorox (CLX) options volume is running 5X the average daily, with 33,000 contracts traded and call volume representing 74 percent of the total
volume.

Increasing options activity is also being seen in US Bancorp (USB), VM Ware (VMW), and Brocade (BRCD).

Implied Volatility Mover
Interdigital (IDCC) shares are rallying to new 52-week highs and implied volatility in IDCC options is moving after the company announced that it was exploring strategic alternatives. Shares of the King of Prussia, PA wireless communication company are up $7.76 to $61.02 and have rallied 47 percent over the past two days (the news was out yesterday). Meanwhile, options volume in IDCC is 15,000 calls and 8,200 puts. Typical volume through midday is about 4,000 contracts. Heavy trading has lifted implied volatility in IDCC options 23 percent to 66, as players appear to be taking positions in anticipation of additional merger-related company news.