Does This Bull Have Legs? 07-08-2010

Cusick’s Corner
The magnitude of yesterday’s move was impressive, but we need to see more follow through over the coming days and weeks to really see if this bull has legs. Into the Midday the markets have been waffling around breakeven and we could be seeing a stock pickers market. Last week I mentioned that you should take time over the long holiday to research some long-term holdings that you would like to scale into as the valuations continue to improve. Well, we are starting to see that transpire with funds, both domestic and sovereign, that are now simply dipping their toes into the water. Any individual looking to potentially invest in the longer term may want to consider LEAPS (long term options expiring anywhere from 1 to over 2 years out) that allow you to have a bullish position with limited risk. See you After Hours.

Stocks opened higher on better-than-expected weekly jobless claims, but trading has since turned mixed midday Thursday. The table was set for early gains on Wall Street after the Labor Department reported that filings for jobless benefits fell by 21,000 to 454,000 in the week ended July 3. Economists were looking for a decline of about 15,000. The Dow Jones Industrial Average, which rallied 275 points the day before, extended the advance and was up nearly 100 points in morning trading. However, the rally fizzled and the Dow is up 40 points midday. The NASDAQ is down 2. The CBOE Volatility Index (.VIX) edged up .20 to 27.04. Overall options volume is picking up and sentiment is leaning a bit more bullish, with 4 million calls and 3.1 million puts traded through 12:30 ET.

Bullish
A number of retailers are out with same store sales numbers and seeing increasing options action Thursday. Abercrombie and Fitch (ANF) is one of them. Shares are up $2.26 to $35.16 after the retailer reported a 9 percent increase in June sales. Options volume is running 7.5X the average daily on the news, and is being driven by bullish trading in the August 32 – 38 risk-reversals. That is, some investors were buying August 38 calls and selling August 32 puts, possibly looking for ANF to extend its rally when it reports earnings in early-to-mid August.

American Eagle Outfitters (AEO) lost 66 cents to $11.60 after reporting a 1 percent decline in June same store sales. Options volume is running 3.5X the average daily on the news with 11,000 calls and 1,030 puts traded through midday. The action includes a multi-exchange sweep of 4,882 November 12.5 calls at the $1 asking price and is an opening customer buyer according to sentiment data. Therefore, although the stock is down on the news, at least one investor in the options market appears to be looking for a move beyond $12.5 per share by the November expiration.

Bearish
iShares Hong Kong Fund (EWH) saw noteworthy trading activity Thursday. Shares of the exchange-traded fund are down 7 cents to $15.12 and the August 15 straddle is apparently sold at $1, 25000X. In other words, an investor apparently sold 25,000 August 15 puts at 42 cents and sold 25,000 August 15 puts at 58 cents. This straddle, which looks like a new position, makes its best profits if shares fall to $15 by the August expiration.

Madison Square Garden (MSG) is down $1.08 to $20.49 and options are busy for a second day, as players await an announcement from Lebron James Thursday evening. The basketball All-star is expected to announce a decision about his future NBA team. While MSG shares were up Wednesday on speculation the Knicks might have a shot at King James, there seems to be growing speculation that he will move to the Miami Heat. MSG is down and some players in the options market appear to be selling July 22.5 and August 20 call options.

Unusual Volume Movers
Marvell Tech (MRVL) options volume is running 2X the usual with 50,000 contracts traded and call volume accounting for about 85 percent of the activity.

H&R Block (HRB) options activity is running 39X the usual with 47,000 contracts traded and call volume representing 90 percent of the volume.
Western Digital (WDC) options volume is running 3X the usual with 22,000 traded and put volume representing 80 percent of the activity.

Unusual volume is also being seen in Sequenom (SQNM), CBOE and CSX.

Implied Volatility Movers
Citigroup (C) options action is heating up ahead of next week’s pivotal earnings report. Shares are up 3 cents to $3.92 and 358,000 calls traded on the bank. There seems to be growing optimism that Citi and other US banks will signal that most of the problems related to the debt crisis have already been recognized in financial results. However, the stocks could see some turbulence when Citi, BofA (BAC) and JP Morgan (JPM) release results next week. Implied volatility in Citi is up 2.5 percent to 44.5 today.