Vol Drops, Heat Still Up 07-22-2011

Cusick's Corner
Earnings and the debt talks remain in focus. CAT earnings failed to impress which is helping to dampen this market. It's hot in DC right now but tempers could get even hotter this weekend if there's no debt deal. Some traders may lack faith in any debt deals being made anytime soon in the U.S., pushing Gold and Silver higher, GLD $156.11 +1.28 (+0.83%) and SLV 39.24 +0.93 (+2.43%). With this political uncertainty in the market, may be worth looking at potential price protection. Consider adding long puts to some already existing long stock or ETF positions that have made a run up or buy the right puts against those already existing naked puts to ultimately create a credit put spread to limit your risk. See you After Hours.

Earnings remain the focus while market action is mixed Friday. Caterpillar (CAT) is trading down 6.4 percent and is the biggest loser in the Dow Jones Industrial Average after the company's profit report didn't live up to the Street expectations. Microsoft (MSFT), Verizon (VZ) and GE are also among Dow stocks seeing post-earnings losses. McDonald's (MCD) is a bright spot in the industrials, however, after gaining 2.8 percent on better than expected profit results. There's nothing on the economic calendar today and, while shares rallied in Tokyo and Hong Kong overnight, European markets are sporting only modest gains. Some of the focus is on Washington as well, where the debate over the budget continues ahead of the August 2 deadline to raise the debt ceiling. Discussions will continue over the weekend. Yet, the primary focus today seems to be on earnings and, as a result, market action is mixed. While the Dow Jones Industrial Average is trading down 32 points, the tech-heavy NASDAQ has added 9. CBOE Volatility Index (.VIX) lost .36 to 17.20. Trading in the options market is slowing ahead of the weekend, with 3.2 million calls and 2.9 million puts traded across the exchanges so far.

Bullish Flow
Boston Scientific (BSX) is trading up 3 cents to $7.11 and options action is heating up in the Natick, MA medical device maker today. 9,550 calls and 110 puts traded in the name so far. August 7 calls, which are now 11 cents in-the-money, are the most actives. 4,150 traded (92 percent Ask). Another 3,300 November 9 calls and 1,000 January 7.5 calls have changed hands as well. It's not clear what's driving the flow, as there is no company specific news in BSX today. It might be a play on earnings, due on July 28.

Express Scripts (ESRX) has added 2.6 percent to $56.77 and has rallied 9 percent since the company announced plans to buy Medco (MHS) yesterday. Trading in ESRX options remains brisk today. 31,000 calls and 13,000 puts traded in the healthcare company so far. Typical volume through midday is about 2,700 contracts. An interest spread traded in ESRX longer-dated January 2013 options. In this four-way spread, the investor sold 5,000 January 40 puts at $1.85 and sold 5,000 January 42.5 puts at $1.85. They also bought 10,000 of the January 60 - 70 calls spreads at $3.50. In other words, they sold puts to finance a call spread and appear to be looking for ESRX to continue rallying through 2013.

Bearish Flow
Verizon (VZ) is down $1.03 to $36.54 and one of nineteen Dow stocks moving lower after the company reported earnings and revenues that slightly topped Wall Street estimates. Shares had been trading higher in the three days prior to the news and slid when the results were announced. Meanwhile, trading in Verizon options is brisk today. 33,000 calls and 36,000 puts traded in the name so far. The top trades hit early when 4,500 January 31 puts traded at 64 cents and 4,500 January 30 puts at 49 cents. Sources tell us the spread was bought for 15 cents and seems to be a bearish play in anticipation of additional weakness in VZ shares through Jan 2012.

Medco Health Solutions (MHS) shares gained $2.16 to $65.99 and has now rallied 18.3 percent since ESRX announced plans to buy the company yesterday (also see today's bullish flow). Meanwhile, 14,000 puts and 2,357 calls have traded in Medco today. August 62.5 puts, which are 5.3 percent out-of-the-money, are the most actives. 5,330 traded. Another 4,510 October 52.5 puts have changed hands. Some investors might be buying puts to protect recent gains. Others might be taking positions on concerns the deal won't pass anti-trust clearance.

Unusual Volume
Caterpillar (CAT) options volume is running 3X the (22-day) average, with 139,000 contracts traded and call activity accounting for 56 percent of the volume.

Verizon (VZ) options volume is 2.5X the average daily, with 70,000 contracts traded and put volume representing 62 percent of the activity.

AMD options volume is running 3X the average daily, with 59,000 contracts traded and call volume representing 72 percent of the total volume.

Increasing options activity is also being seen in McDonald's (MCD), Schlumberger (SLB) and MBIA (MBI).

Implied Volatility Mover
Murphy Oil (MUR) implied volatility is moving higher amid heavy trading in options on the El Dorado, AR oil and gas driller. Shares have added 68 cents to $68.87. Options volume is 23,000 calls and 1,940 puts. Looks like speculative buyers are taking positions in October 80 and August 72.5 calls. Meanwhile, implied volatility is moving up 10 percent to 37. The flow is interesting, as MUR was the subject of bullish trading on 7/14 and 7/20 as well.