FOMC Decision Today 08-09-2011

Cusick's Corner
Top stories -- London burning and market bouncing into the Fed announcement. While I would not aggressively chase long trades, intraday scalping has been solid, but look to get flat in front of the Fed. The shorts will be lurking, waiting for any catalyst to the downside, on the ready to pound equities and commodities, specifically gold. See you After Hours.

Stocks are broadly higher after several days of heavy selling on Wall Street. The Dow Jones Industrial Average lost more than 600 points yesterday and had suffered a two-week 14.1 percent decline prior to today. Oversold market conditions and some bargain hunting helped lift the industrial average in morning trading. It's been a relatively light news day so far. Data released early Tuesday showed productivity falling by .3 percent in the second quarter. Economists were looking for a decline of .6 percent. The data didn't get much attention, however, and the focus now shifts to the FOMC rate decision the afternoon. Investors will be scrutinizing the post-meeting announcement to see if Federal Reserve officials have plans to help stimulate a slowing US economy. Crude oil has also rebounded from two weeks of heavy losses and is up 75 cents to $82.06. Gold continues to set records and gained another $26.4 to $1738 an ounce. Meanwhile, the Dow Jones Industrial Average has recaptured 185 points and the tech-heavy NASDAQ gained 75. CBOE Volatility Index (.VIX) closed at 15-month highs of 48 yesterday and is down 7.25 to 40.75. Trading in the options market remains very active, with 8.3 million calls and 9.2 million puts traded through 12:30pm ET.

Bullish Flow
Weatherford (WFT) gains 58 cents to $16.51 and a noteworthy spread trades in the oil driller today after one strategist bought 14,100 September 17 calls at $1.36 and sold 14,100 August 18 calls at 42 cents. In other words, the investor paid a 94-cent net debit for the Aug 18 - Sep 17 call diagonal spread. The trade might be a bet that shares will hold below $18 through the August expiration, which at the end of next week, and then rally through September. Or, it's possibly rolling activity. That is, after a two-week 26.4 percent slide in shares, the strategist is closing out a position in the August calls to open a new bullish position in September, but down one strike price. Weatherford shares rallied on July 26 on upbeat earnings, but have been slammed since that time on falling crude oil prices and big losses in the broader market.

92,000 calls and 14,000 puts traded in Yahoo (YHOO) today. Shares of the Internet search giant are up 63 cents to $11.72 and trying to rebound after a three-month 37.8 percent slide. YHOO touched 52-week highs of $18.84 in early May, but has been in a bearish funk since that time. Some investors seem to be looking for a rebound through October as 32,700 Oct 16 calls on Yahoo have traded. Another 22,130 October 14 calls have changed hands. Investors are possibly taking bullish positions in Yahoo after AOL's earnings showed an improvement in ad sales.

Bearish Flow
MGM shares are down 60 cents to $10.94 after the casino operator reported a $365.8 million second quarter profit, which apparently fell short of some Street estimates. Shares are down on the results and falling to their lowest levels since November. MGM has now tumbled more than 30 percent during the past two weeks. Today's volatility has stirred up a lot of options action in the name today. 75,000 calls and 39,000 puts traded so far. The top trades are part of a three-way spread, in which the investor bought 5,560 Aug 11 puts at 80 cents and sold 5,560 August 14 - 16 call spreads at 3 cents. The trade might close an existing bullish position on diminishing hopes for a rally in MGM through the August expiration, which is in 10 days.

Proshares Ultra Short S&P Fund (SDS), which is designed to move twice the inverse to the S&P, is down $1.27 to $26.48 midday Tuesday. Meanwhile, 203,000 calls and 27,000 puts traded in the ETF. August 30 calls, which are now 13.3 percent out-of-the-money, are the most actives. More than 85,000 traded, including a morning buyer of 9,800 contracts at 98 cents each. August 31, 32 and 33 calls on the ETF are seeing heavy trading as well. OTM call buying on the inverse S&P 500 is a bullish play on the ETF, but represents a bearish play on the S&P 500.

Unusual Volume
Citigroup (C) options volume is running 2.5X the (22-day) average, with 427,000contracts traded and call activity accounting for 55 percent of the volume.

IShares DJS Real Estate ETF (IYR) options volume is 4.5X the average daily, with 199,000 contracts traded and put volume representing 64 percent of the activity.

Oil Service HOLDRS (OIH) options volume is running 2X the average daily, with 23,000 contracts traded and put volume representing 80 percent of the total volume.

Increasing options activity is also being seen in Newscorp (NWS), AK Steel (AKS), and Manitowac (MTW)

Implied Volatility Mover
Bank of America (BAC) implied volatility is easing a bit today, but remains elevated after shares tumbled 31.8 percent during the past three days and fell to new two-year lows of $6.31 Monday. Options on the bank remain very heavily traded. 312,000 calls and 304,000 puts traded in BAC so far. Longer-term January 2013 7.5 calls are the most actives. 34,227 traded. Shares are up 47 cents to $6.97 and some investors are probably taking positions in the contract on hopes BAC might recapture $7.5 through January 2013. Meanwhile, implied volatility in BAC options is down about 23 percent, but remains high at 113 percent. The high IV reflects the uncertainty investors face with respect to the short-term outlook for BAC.