Running of the Bulls 07-21-2011

Cusick's Corner
Major markets continue to be in full bull mode while the debt talks continue. The Volatility Index (VIX) is down to 17.56 (see Index Trading) because the latest earnings-reporting season has been mostly upbeat. Merger mania is on -- pharmacy benefits management company Express Scripts Inc (ESRX) announced a $29.1 billion deal to acquire rival Medco Health Solutions Inc. (MHS). You might want to keep an eye on other companies within the Healthcare sector to see if there are any other candidates. See you Friday.

Stock market averages finished with solid gains on upbeat earnings and diminishing concerns about the European Debt Crisis Thursday. Morgan Stanley (MS) rallied 11.4 percent and was a leader among the financials after the investment bank's profits and revenues topped expectations. AT&T (T), Union Pacific (UNP) and Philip Morris (MO) also posted gains earnings news. At the same time, the euro and equity benchmarks across the Eurozone were strong again today after EU officials moved closer to approving aid to Greece following a meeting in Brussels. The domestic economic news was mixed. Data released before the bell showed jobless claims up by 10,000 to 418,000 last week. Economists were looking for a 3,000 increase. Meanwhile, the Philadelphia Fed Manufacturing Survey improved in July, but remains at low levels of 3.20 (consensus was 0.0). The List of Leading Indicators increased by .3 percent in June, which was in-line with expectations. At the end of the day, it seemed that earnings and hopes for the Eurozone were the primary drivers for market action. The Dow Jones Industrial Average had added 152 points and the tech-heavy NASDAQ gained 20.2.

Bullish
An interesting spread traded in Chevron (CVX) today. Shares of the energy giant added 2.2 percent to $109.43 and were among 29 Dow stocks moving higher Thursday. Intel (INTC), which released earnings late-Wednesday, was the only component of the industrial average to move lower. CVX edged up along with crude oil - which added 72 cents to $99.12 per barrel. Meanwhile, in CVX options action, one investor was active in the September 115 - 120 call spread. They apparently bought 4,264 Sep 115 calls at $1.14 and sold 4,264 Sep 120 calls at 29 cents. Therefore, an 85-cent debit was paid and this investor might be looking for CVX to rally beyond $120, a gain of almost 10 percent, through the September expiration.

Bullish trading was also seen in Yahoo (YHOO), Walgreen (WAG), and AOL.

Bearish
Put volume picked up in Home Depot (HD) today. Shares, which are also part of the Dow Jones Industrial Average, added 31 cents to $36.92 on the session. Meanwhile, 48,000 puts and 6,600 calls traded on the home improvement retailer - a ratio of more than 7-to-1. The top options trade of the day was a buyer of 15,000 September 36 puts for $1.05 per contract. 25,873 Sep 36 puts on Home Depot traded total. August 36, 37 and 38 put options were busy as well. Bearish trading in Home Depot might be a play on earnings. The company is due to release results in mid-August, possibly inside the August expiration.

Bearish flow also surfaced in Hertz (HTZ), ZAGG, and Pepsico (PEP).

Index Trading
Calls on the CBOE Volatility Index (.VIX) were actively traded again today. The market's fear gauge lost 1.53 to 17.56 and is on a three-day 16.2 percent losing skid. The recent decline in the volatility in the index comes as the latest earnings-reporting season has been mostly upbeat and the euro has staged an impressive two-day 2.2 percent advance against the dollar. Concerns about the European Debt Crisis and the fate of the euro had been hanging over the markets for weeks. VIX is easing as some of those worries have subsided. At the same time, another 484,000 calls and 95,000 puts traded in the VIX pits today. VIX September 32.5 calls were the most actives. 84,230 changed hands. While some investors are likely liquidating positions in these out-of-the-money calls as VIX falls, others are possibly taking new positions on the view that market volatility is likely to remain high through the summer months and into mid-September.

ETF Action
Options on the iShares Japan Fund (EWJ) were actively traded Thursday. EWJ, which holds shares of leading Japanese companies listed on the Tokyo Stock Exchange, added 9 cents to $10.86. 79,000 calls and 70,000 puts traded on the ETF today. A lot of the volume was due to apparent bullish risk-reversals. For example, 25,000 January 9 puts traded on the 12 cent bid while 25,000 January 12 calls traded at the 15-cent asking price. Similar trades surfaced in the December 9 - 12 bullish risk-reversal at three cents, 25000X.The trades look like a combo for a three-cent debit and bets that shares will rally beyond $12 in the months ahead.