What's The Dealio? 07-26-2011

Cusick's Corner
This is frustrating, choppy action in the markets today and when they start acting like this you really want to keep your focus and patience on positioning. Gold traders, GLD, are the most frustrated, this market looks like it should just turn over but just has not turned south, and the bid keeps getting nibbled, especially since there is no impasse on the Debt ceiling issue. Tech, QQQ/XLK, and Consumer Discretionary, XLY, are the backbone of this market but I am leery of the Small Caps, IWM, and Financials, XLF. If the Small Caps become pressured and turn course this could be a red flag that a possible distribution could muster strength, keep an eye on the $82 level in the IWM. See you After Hours.

Market action is mixed on earnings news today. Broadcom (BRCM) shares rallied 9.8 percent and are among the best gainers in the NASDAQ 100 after the chipmaker's profits topped Street estimates. RadioShack (RSH), Weatherford (WFT), and Baidu.com (BIDU) are also up on earnings news today. However, 3M (MMM) is down 4.7 percent and the biggest loser in the Dow Jones Industrial Average after the company posted disappointing results. US Steel (X), Eastman Kodak (EK), and BP are also seeing post earnings weakness. On the economic front, the news was also mixed. While the latest Consumer Confidence report showed a surprise increase to 59.5 in July (from 57.6 in June and compared to 56.0 expected), New Homes Sales fell to an annual rate of 312K in June (from 315K and compared to 320K consensus). At the same time, the underlying tone of trading is cautious amid uncertainty about the implications of a potential US debt default and the ongoing stalemate in Washington over raising the debt ceiling. The Dow is down 63 points, but the tech-heavy NASDAQ added 4.2. CBOE Volatility Index (.VIX) edged up .46 to 19.81. Trading in the options market is relatively light for a second day this week, with 4.3 million calls and 3.5 million puts traded through 12:30pm ET.

Bullish Flow
35,000 calls and 4,740 puts traded in Marvell Technology (MRVL) today. Shares are up 40 cents to $15.69 amid relative strength in the sector after chipmaker Broadcom (BRCM) rallied nearly 10 percent on earnings news. The top options trades in Marvell today are part of a spread, in which the strategist sold 10,500 January 14 calls at $2.62 and bought 10,500 November 16 calls at $1.19. Therefore, they collected $1.43 on the spread. Looking at the historical data, the spread might roll a position in January 14 calls opened on June 20 when the stock was about 17 percent below current levels. The investor might be closing out the position because the Jan 14 call is now in-the-money and opening a new bullish position in the Nov 16 calls, which are slightly out-of-the-money.

SPDR Gold Fund (GLD) is flat at $157.34 after the yellow metal gained $1.8 to $1,614 an ounce. GLD is an exchange-traded fund that owns the actual commodity. In options action, one strategist seems to be expecting higher gold prices and initiated a sizeable call spread on the gold ETF today. In late-morning action, 20,000 GLD August 167 calls were bought at 39 cents and 20,000 August 175 calls sold at ten cents. Therefore, the investor paid a 29-cent net debit for the GLD Aug 167 - 175 call spread, 20000X. Volume exceeds open interest in both contracts and so this appears to be a new position. If so, it's an aggressive play. Excluding commissions, the breakeven at expiration is at $167.29, which represents a 6.3 percent rally in gold over the next 24 days.

Bearish Flow
Homebuilder DR Horton (DHI) shares are down 12 cents to $11.85 after data released Tuesday morning showed New Home Sales falling to an annual rate of just 312,000 in June. Economists were expecting an increased to 320,000 from 315,000 in May. DHI is trading down on the data and options volume in the builder is 8,460 puts and 1,080 calls. August 11 puts, which are 7.2 percent out-of-the-money and expiring in 24 days, are the most actives. 7,570 traded. September $11 puts are seeing interest as well. Some investors are possibly taking positions in downside DHI puts on concerns about further weakness in shares heading into a July 28 earnings report.

SPDR Metals and Mining Fund (XME) is trading down $1.38 to $69.93 and options volume in the ETF today is 53,000 puts and 1,410 calls. Much of the put volume is due to one spread trade, in which the investor bought 15,000 September 63 puts at $1.31 and sold 30,000 September 58 puts at 59 cents. Therefore, they paid a 13-cent net debit for this 1X2 put ratio spread and are possibly betting that XME will dip towards $58 through the September expiration. The debit is at risk if shares hold above $63 and there is additional risk to the downside because only half of the Sept 58 puts (which were sold) are covered by the Sept 63 puts (which were bought).

Unusual Volume
US Steel (X) options volume is running 2X the (22-day) average, with 78,000 contracts traded and call activity accounting for 56 percent of the volume.

SPDR Retail Trust (XRT) options volume is 3X the average daily, with 22,000 contracts traded and put volume representing 99 percent of the activity.

Weatherford (WFT) options volume is running 3X the average daily, with 56,000 contracts traded and call volume representing 71 percent of the total volume.

Increasing options activity is also being seen in Juniper Networks (JNPR), AK Steel (AKS), and UPS.

Implied Volatility Mover
Supervalu (SVU) shares are up 68 cents to $9.20 and implied volatility is sharply lower after the grocer reported earnings that topped Street estimates. Options volume is running 4X the average daily, 23,000 puts and 4,570 calls traded in Supervalu so far. The top trade is a 20,000-contract block of SVU August 9 puts sold at 35 cents per contract. It's possibly a closing trade after shares rallied on the earnings results. Meanwhile, implied volatility in Supervalu options is down 27 percent to 48 now that the event risk has passed.