It's Inverted Hammertime! 06-06-2011

Cusick's Corner
With Finance and Energy challenged, plus AAPL under some pressure, the shorts have the strength on their side in spite of Friday's Bullish technical set up that created an inverted hammer. The market looks poised for continued safe haven buying, Gold/Silver, along with continued confusion and choppy action going into the After Hours. I want to see if the April lows will hold and get a bounce into the close. If not, we could see March Lows tested. See you After Hours.

Market action is sluggish Monday morning. With no economic data or earnings of importance to guide the early action, cautious trading continued after five consecutive weeks of losses on Wall Street. The AMEX Airline Index (.XAL) is down 1.8 percent amid relative weakness in the sector after an industry trade group cut its profit forecast on the group. High fuel costs, unrest in the Middle East, and the Japan quake are among the reasons for the revised outlook. Meanwhile, within the Dow Jones Industrial Average, two of the financials - BofA (BAC) and JP Morgan (JPM) - are the biggest losers. However, the decline has been orderly thus far and the Dow is down just 7 points. The tech-heavy NASDAQ gave up 5.5 points. The CBOE Volatility Index (.VIX) drifted down .29 to 17.66. Trading in the options market is relatively slow and defensive, with 3.6 million calls and 3.8 million puts traded through 12:15pm ET.

Bullish Flow
MGM shares are up and options on the casino-operator are actively traded ahead of a conference presentation. Shares added 7 cents to $14.26 and options volume includes 19,000 calls/13,000 puts. June 14 calls, which are now 26 cents in-the-money and expire in 11 days, are the most actives. 6,180 changed hands so far and. Since 68 percent of the options volume traded at the ask, it looks like buyers are dominating the action. June 15 and 16 calls are seeing heavy trading as well. June 12s and 13s are the most active puts. Implied volatility is up 5.5 percent to 45.5, as some investors appear to be anticipating some new company-specific information when MGM presents today at a Goldman Sachs Lodging, Gaming, Restaurant and Leisure conference.

Ford Motor (F) loses a penny to $14 and has been driven 6.2 percent lower since monthly auto and truck sales were reported last Wednesday. Options on the automaker are actively traded as well. 144,000 calls and 82,000 puts so far. One investor sold a block of 35,000 January 12.5 calls on the automaker. They also bought 35,000 August 15 calls, 17,500 January 16 calls and a few other smaller blocks of out-of-the-money call options on the automaker. In doing so, they might have exited a position in the January 12.5s, which are 1.50 in-the-money, to open new bullish positions in OTM call options.

Bearish Flow
Today's most actively traded contract so far is the June 77 put option on the iShares Small Cap ETF (IWM). Shares of the small cap fund are down 52 cents to $80.36 and volume in the Jun 77 put is 57,600 contracts. Much of the volume is due to one spread trade, in which the investor sold 20,000 June 82 puts and bought 40,000 June 77 puts. This 1X2 put ratio backspread was initiated at a credit and might be their forecast that shares will either 1) move back above $82 through the June expiration (in 11 days) and all the puts expire worthless or 2) shares make a substantial move lower between now and the expiration, and the spread makes money because there's more long (77 puts) compared to short (82 puts). On the other hand, it might a closing trade or maybe a roll, as there is substantial open interest in both contracts.

Gen-probe (GPRO) shares are down and calls on the research company are being sold after the Wall Street Journal reported that Novartis (NVS) is the sole remaining bidder for GPRO. There has been talk previously that multiple bidders would be interested in Gen-probe. The stock is down $10.12 to $71.64 and August 85 calls are the most actives. 6,550 traded and, with 93 percent on the bid and open interest of 8,751, it appears that call sellers are closing out positions. The contract is now 18.6 percent out-of-the-money and has the most open interest of any GPRO contract.

Unusual Volume
Lorillard (LO) options volume is running 4.5X the (22-day) average, with 26,000 contracts traded and put volume accounting for about 73 percent of trades.

Focus Media (FMCN) options volume is 2X the average daily, with 20,000 contracts traded and put volume representing for 84 percent of the activity.

Starbuck's (SBUX) options volume is running 2X the average daily, with 18,000 contracts traded and put volume accounting for 59 percent of the activity.

Increasing options activity is also being seen in United Therapeutics (UTHR), Nucor (NUE), and Harley Davidson (HOG).

Implied Volatility Mover
Lorillard (LO) shares are down and implied volatility is up on news a court has ruled to allow a tobacco racketeering lawsuit to proceed. Shares opened lower following multiple broker downgrades and are off $7.05 to $100.68 at midday. Options volume includes 19,000 puts and 7,260 calls. July 110 and 90 puts are the most actives. Implied volatility jumped 33 percent to 55.