China Ordering U.S. Takeout 06-21-2010

Cusick’s Corner
The market did like the news out of China, so the question is – who or what will benefit from this new stance on the Chinese currency? One major benefactor, non-Chinese manufacturers could benefit from the Yuan’s greater buying power. Thus, China would be able to buy products that are manufactured outside of China at competitive rates. This does presume that the demand for such products or growth will continue in China and that the Chinese government does not step in and stop the Yuan from appreciating, right now +/- .5% a day. Some potential sectors to benefit from this new policy -- Construction Equipment, Base Metals, Coal, and Fertilizer are some of the more notable. See you After Hours.

Stocks are broadly higher on news China unpegged the yuan from the dollar, but the stock markets are now well off session highs at midday. The table was set for morning gains on Wall Street after the People’s Bank of China announced plans to remove the peg between the yuan and the US dollar. The initial move was implemented two years ago during the global financial crisis. Its removal signals greater confidence in China’s economy and a more open trade policy. Equity markets rallied across Asia on the news and were broadly higher across Europe before the start of trading in New York. With no domestic economic or earnings data to guide trading, the Dow Jones Industrial Average rallied and was up more than 140 points mid-morning. However, trading has turned a bit more cautious midday and the Dow is now up 61 points. The CBOE Volatility Index (.VIX) edged up .47 to 24.42. Trading is active due to the options expiration, with about 4.5 million calls and 3.6 million puts traded at 12:45 ET.

Bullish
Alcoa (AA) is up 7.7 percent to $11.96 and the best gainer in the Dow Jones Industrial Average Monday. Options action is heating up as well, with about 80,000 calls and 21,000 puts traded so far. The top trade is a block of 8,900 July 12 calls on the International Securities Exchange, where sentiment data indicate this trade is a customer opening a new position. 32,600 contracts now traded. Another 14,500 June 13 calls also changed hands. Shares have been battered in recent months, down nearly 37 percent since January, and some investors might be buying July calls as a cheap way to play the stock for a rebound.

Storage device maker EMC shares are up 7 cents to $19.42 and call options are busy Monday. 26,000 traded so far, which is 6X typical volume for midday and 6X the number of puts. Investors are showing the most interest in July 20 calls. 17,900 contracts have traded so far and, with 85 percent of the volume traded at the asking price, it appears that call buyers are dominating the action, possibly looking for a move beyond $20 by the July expiration.

Bearish
A couple of chipmakers see bearish trading Monday. AMD is one of them. Shares are up 21 cents to $9.04 and 16,000 puts traded in the name. The action includes a buyer of 5,500 August 9 puts at 74 cents each in morning trade. The position was tied to a block of 240,000 shares, according to a source on the floor, and probably a volatility play. Meanwhile, the July 9 – 10 put spread was bought at 68 cents, 2500X. That is, the investor bought 2,500 July 10 puts at $1.14 and sold July 9 puts at 46 cents, which creates a bearish position with a max profit if shares fall to $9 or less by the July expiration.

Meanwhile, Micron Technology (MU), another semiconductor company, is up 15 cents to $10.15 and a block of 19,000 January 9 puts traded at $1.08 on the ISE. It was an opening customer buyer, according to ISEE sentiment data. The trade was probably tied to a block of 589,000 shares that traded at about the same time. So, it doesn’t appear to be a straight bearish bet, but rather a volatility play on the chipmaker.

Unusual Volume Movers
Russell 2000 Small Cap Fund (IWM) options volume is running 2X the usual, with 161,000 contracts traded and put volume accounting for about 68 percent of the activity.

Select Sector Basic Materials (XLB) options activity is running 5X the usual, with 63,000 contracts traded and put volume representing 98 percent of the volume.
General Mills (GIS) options volume is running 7X the usual, with 36,000 traded and put volume representing 89 percent of the activity.

Unusual volume is also being seen in Amgen (AMGN), Xerox (XRX), and Intermune (ITMN).

Implied Volatility Movers
After falling from 86 to 73 last week, implied volatility in BP is moving higher Monday. Shares are down 3 percent to $30.80 after the oil giant warned that the cost of the oil spill is reaching $2 billion. Meanwhile, options trading remains active, with another 75,000 calls and 66,000 puts changing hands so far. Implied volatility is now up 5.5 percent to 77.