Fed Speaks: Will Bears Scratch or Bulls Run? 04-27-2011

Cusick's Corner
Not much changed in the Fed statement except that they acknowledged there's inflation (specifically commodity inflation) and the market handled that observation better than I expected. What will be interesting about this unprecedented press conference is if the right or important questions will be allowed to be asked -- like was the entire stimulus worth it when employment is still slow and housing is still struggling. If Big Ben acknowledges inflation risk, the bear claws could come out, but if he sticks with the script, no inflation and things are better, and signals that QE2 is winding down but in the ready if trouble arises, the bulls could run the Streets. See you After Hours.

Stock market averages are holding modest gains with help from a report on Durable Goods, but the overall market tone has a wait-and-see feel ahead of the Federal Reserve's post-meeting statement and press conference. Data was in focus early after a report showed orders for durable goods up 2.5 percent in March, which was up from .7 percent in February and better than the 1.8 percent increase that economists had expected. The earnings news is mixed. Amazon.com (AMZN), Corning (GLW), and Dow component Boeing (BA) are up after results topped Street views. Broadcom (BRCM) fell. Now, investors are awaiting the Fed's statement and first-ever post-meeting conference call. While no changes in rates are expected, investors will scrutinize Fed officials for signs of policy change and updates to the QE2 Treasury buyback program. The Dow Jones Industrial Average is up 20 points and the tech-heavy NASDAQ is flat ahead of the news. The CBOE Volatility Index (.VIX) added .31 to 15.93. Overall options volume is running about the typical levels, with 4.8 million calls and 3.4 million puts traded through 12:00pm ET.

Bullish Flow
LM Ericsson (ERIC), the Swedish phone company, is trading up $1.50 to $14.64 and touching a new 52-week high after the company's quarterly earnings and revenues exceeded analyst estimates. Options volume is 20X the average daily after 22,000 calls and 1,020 puts traded in ERIC today. July 15 calls, which are now 2.5 percent out-of-the-money, are the most actives. 18,830 traded. Open interest is more than 20,000 and the biggest open position in Ericsson. Some investors might be closing positions after the stock rallied around the earnings news today.

Baker Hughes (BHI) shares gained $1.86 to $75.82 and notched new 52-week highs today after the oil driller reported profits that topped Street estimates. 44,000 calls and 14,000 puts have traded in the name. The action includes a spread, in which the investor sold 14,000 July 65 calls and bought 20,000 July 75 calls. The action looks like a closing of a ratio spread opened in early-January. Shares of the oil driller have rallied 36.3 percent in-the-money and the strategist is probably closing out the position and banking a profit in Baker Hughes call spreads today.

Bearish Flow
Coinstar (CSTR) shares are up a dime to $50 and options volume in the vending machine operator is running 2X the average daily, after 7,520 puts and 1,425 calls traded in the name. May 47.5 puts, which are 5 percent out-of-the-money and expire in 23 days, are the most actives. 5,425 traded, mostly at the offer. Open interest is 2,060 contracts. It looks like some investors are taking positions in July 47.5 puts as well, which have traded 1,160 contracts. The bearish trading might be hedging activity or outright bets that shares will fall when CSTR reports earnings tomorrow afternoon. Shares fell nearly 12 percent on the heels of its previous profit report.

ProShares Ultra Short S&P 500 (SPXU) is seeing increasing call activity Wednesday. Shares, which move 2X the inverse of the S&P 500, are down 2 cents to $15.08 and options volume is two times the typical levels. 3,600 calls and 120 puts traded on the ETF so far. March 16 and 17 calls are the most actives, as it appears that some investors are buying upside calls on the SPXU. By doing so, they are actually making bearish market bets, as shares of the fund will rally if the S&P 500 makes a move lower.

Unusual Volume
Amazon.com (AMZN) options volume is running 3X the (22-day) average, with 211,000 contracts traded and call volume accounting for about 53 percent of trades.

Longtop Financial (LFT) options volume is 5X the average daily, with 38,000 contracts traded and put volume representing for 57 percent of the activity.

Broadcom (BRCM) options volume is running 4.5X the average daily, with 86,000 contracts traded and call volume accounting for 55 percent of the activity.

Increasing options activity is also being seen in Corning (GLW), JDS Uniphase (JDSU), and Boeing (BA).

Implied Volatility Mover
Implied volatility in LongTop Financial (LFT) is reaching new highs, as shares come under fire for another day. Shares of the Hong Kong-based financial software company lost 12.9 percent after Citron Research wrote a cautionary note about the company Tuesday. LFT is down another 10.3 percent to $19.94 today and has now fallen 38.7 percent since April 7. Meanwhile, 17,000 calls and 23,000 puts traded in LFT through midday. Implied volatility is also moving, up 9 percent to 105 and new record highs.