Disappointing Data 05-26-2011

Cusick's Corner
Stocks are trading mixed in the wake of disappointing economic data. A report released early Thursday showed Gross Domestic Product increasing at an annual rate of just 1.8 percent during the first quarter of this year. Economists were looking for an increase of 2 percent. Separately, the Labor Department reported that jobless claims increased to 424,000 in the week ended May 21. Economists were expecting a decline to 400,000 from 414,000. Weak data seems to be weighing on some of the commodities. Crude oil lost $1.32 to $100 per barrel and gold gave up $7.40 to $1,519.30 an ounce. Meanwhile, the Dow Jones Industrial Average is flat at midday, but 77 points off session lows. The tech-heavy NASDAQ added 18.00. The CBOE Volatility Index (.VIX) lost .77 to 16.30 on a third day of slow market action. Overall options volume is light again, with 3.4 million calls and 3.5 million puts traded through 12:45 pm ET.

Bullish Flow
107,000 calls and 30,000 puts traded in Microsoft (MSFT) through midday. Shares of the software giant are up 55 cents to $24.73and the best gainers in the Dow Jones Industrial Average after activist fund manager David Einhorn told an audience at an Ira Sohn conference late Wednesday that the company's board should replace Chief Executive Officer Steve Ballmer. Meanwhile, June 24 calls are the most actively traded options contract in Microsoft. Volume is approaching 20,000 and some investor might be closing out positions now that the contract is 80 cents in-the-money and the June expiration is a little more than three weeks away. However, short-term players are also focused on the Weekly and June 25 calls, which are 20 cents out-of-the-money. While the June contract expires in 22 days, the Weeklys are expiring after tomorrow.

A large call spread trades in Marvell Technology (MRVL) ahead of its earnings report. The chipmaker is due to release results after the closing bell and trading in the options market is brisk ahead of the results. 54,000 calls and 6,380 puts have traded in Marvel ahead of the news so far. June and July 16 calls are the most actives. Shares are up 21 cents to $14.39 and, in morning trading, one investor bought the spread at 13 cents, 13,800X. That is, they sold 13,800 June 16 calls at 9 cents and bought 13,800 July 16 calls at 22 cents. They might be betting that shares will hold below $16 through the June expiration and then rally beyond that price level through mid-July. Or, they might be rolling a bullish position from June to July 16 call options.

Bearish Flow
The largest (by number of contracts) options trade so far today is in the iShares Silver Fund (SLV). Shares are down 44 cents to $36.48 after silver (July) sank 32 cents to $37.32. Meanwhile, the big options trade of the day was a block of 100,000 July 25 puts. The position was apparently sold at 10 cents per contract. Another block of 21,000 July 30 puts traded at 48 cents within minutes. The action might be part of a ratio spread, in which the investor bought the July 30s and sold almost 5X as many 25s. If so, it's a bearish play on silver, as the spread reaps its max profits if SLV shares fall to $25 through the July expiration.

Sandridge Energy (SD) pops $1.24 to $12.04 and options are actively traded today after the company announced plans for an offering of its SanDridge permiam trust. Shares rallied on the news and a noteworthy options trade today is a June - September 8 put spread, which was bought at 27 cents, 9000X. In this spread, the investor bought 9,000 of the September 8 puts and sold 9,000 June 8 puts. These contracts are deep out-of-the-money after today's rally and the spread trader might be rolling a bearish position, or a hedge, out an additional three months.

Marvel Technology (MRVL) options volume is running 2.5X the (22-day) average, with 62,000 contracts traded and call volume accounting for about 91 percent of trades.
KB Homes (KBH) options volume is 7X the average daily, with 41,000 contracts traded and call volume representing for 53 percent of the activity.
NetApp (NTAP) options volume is running 2X the average daily, with 35,000 contracts traded and call volume accounting for 73 percent of the activity.
Increasing options activity is also being seen in AK Steel (AKS), Tiffany (TIF), and Pulte Group (PHM).

Implied Volatility Mover
Harbin Electric (HRBN) implied volatility is moving higher amid increasing put volume. The stock is off 91 cents to $16.16 and volume in the options mart is 24,000 puts and 8,600 calls. September 15 puts are the most actives. June 10, 12.5 and 15 puts are seeing active trading as well. There's no news on the Chinese industrial equipment company. But, implied volatility has jumped more than 40 percent to 140, as players in the options market seem to be bracing for gyrations in Harbin Electric shares.