Rally Extended 06-29-2011

Cusick's Corner
Today's snapshot: Greeks respond to austerity measures, BAC settles and bonds tumble. The Finance sector had the largest lift into the midday, thanks to more clarity from Bank of America concerning fallout from the mortgage and CDS markets which additionally helps estimate the potential liabilities of their peers and essentially move on. The weak Dollar has also been a catalyst for the commodity markets. See you After Hours.

Stock market averages are holding gains after Greek parliament approved austerity measures designed to avoid debt default. Stocks rallied across the Eurozone, paced by a 1.9 percent advance in France's CAC 40. Meanwhile, the euro added .3 percent against the dollar. Diminishing fears about spreading debt problems in the Eurozone also helped set a positive tone for trading on Wall Street. The day's economic news included a report on Pending Home Sales, which showed a surprise jump of 8.2 percent in May. Economists were expecting a decline of .2 percent. Meanwhile, BofA (BAC) shares are up 3 percent and the best gainers in the Dow Jones Industrial Average after the bank announced a settlement with mortgage investors. Monsanto (MON) and General Mills (GIS) are up on earnings. Overall, the day's news flow was upbeat enough to help extend the recent rally. The Dow Jones Industrial Average is up for a third time this week and has added 75 points through midday. The tech-heavy NASDAQ gained 14. CBOE Volatility Index (.VIX) is off 1.56 to 17.61. Trading is active today and seems to reflect mixed sentiment, with 4.5 million calls and 4.3 million puts traded through 12:30pm ET.

Bullish Flow
Kinross Gold (KGC) shares are up 35 cents to $15.51 after gold gained $10.2 to $1,510.4 an ounce. Meanwhile, options order flow is interesting, as 21,000 calls and 1,510 puts traded on the Toronto-based gold miner through midday. August 15 calls, which have traded 17,350 contracts, are the most actives. The Aug 15 call on Kinross is now 51 cents in-the-money and expires in 51 days. It appears that investors have been paying between $1.05 and $1.20 to open new positions in the contract, possibly betting that higher gold prices will drive shares of the miner higher in the weeks ahead. However, KGC has not performed well in 2011 despite the recent rally in gold and is down 18.2 percent year-to-date.

EBAY shares added 33 cents to $29.29 and options volume is running twice the average daily, with 48,000 calls and 30,000 puts traded in the name so far. One noteworthy trade in the online auctioneer is a ratio spread, in which the investor apparently bought 2,500 July 29 calls at $1.23 and sold 5,000 July 32 calls at 22 cents. They therefore paid 79 cents for this 1X2 call ratio spread and, if this is a new position, it's a bullish play. The spread offers its best payoff if shares settle at $32 at the July expiration, which represents a 9.3 percent advance over the next 16 days.

Bearish Flow
An interesting spread trades in the SPDR 500 Trust (SPY) today. Shares have added $1.10 to $130.71 and an investor sold 92,000 July 126 puts at 73 cents per contract. They also bought 46,000 July 123 puts at 40 cents and bought 46,000 July 129 puts at $1.45. In other words, they initiated a massive July 123 - 126 - 129 put butterfly spread for a 39-cent net debit. The 123s and 129s are the wings of the fly and the 126 is the body. The max payout happens if shares settle at $126 (body) at the July expiration. Since the SPY holds the S&P 500 names, the maximum gain is offered if the market declines by 3.6 percent over the next 16 days.

KB Homes (KBH) is trading down $1.50 to $10.43 after the homebuilder reported a hefty 89-cent per share quarterly loss, which was 58 cents worse than the Street had expected. Options in KBH are busy for a second day. Yesterday's flow was driven by August 12 call writers (see yesterday's closing report). Today, the action is scattered. 8,700 calls and 14,000 puts traded in the name so far. July 10 and 11 puts are the most actives.

Unusual Volume
iShares Japan Fund (EWJ) options volume is running 12X the (22-day) average, with 109,000 contracts traded and put activity accounting for 99 percent of the volume.

Nike (NKE) options volume is 5X the average daily, with 51,000 contracts traded and put volume representing 50 percent of the activity.

Seagate Tech (STX) options volume is running 2X the average daily, with 27,000 contracts traded and call volume representing 99 percent of the total volume.

Increasing options activity is also being seen in Lennar (LEN), Pulte Group (PHM), and KB Homes (KBH).

Implied Volatility Mover
Spreadtrum Communications (SPRD) implied volatility is falling after the company responded to negative commentary from Muddy Waters Research. Shares saw very volatile action Tuesday and fell to an intra-day low of $8.59 on the critical commentary. Today, however, SPRD is up $1.44 to $13.93 after the Chinese chipmaker responded to concerns about recent changes of accounting firms. Spreadtrum also announced a stock buyback and 5-cent dividend. The move seemed to have eased some of the recent anxiety about the company. Implied volatility in SPRD options is down 25 percent to 113.