Slow Trading - But Stay On Your Toes 07-09-2010

Cusick's Corner
The market is hanging in there but still not able to break down trend. Key sectors like XLF, XLK, and XLI have yet to breakout with conviction. Watch the last few hours of trading, some new shorts may potentially hit the market. Do not let the dog days of summer lull you. Stay on your toes, the bears are still in control. See you After Hours.

The major averages are little changed in a day of relatively slow trading Friday. With no economic data to guide the early action, the major averages opened steady heading into a report on Wholesale Inventories. The data released at 10:00 ET, showed an increase of .5 percent in May and not far from expectations of .4 percent. The market showed little reaction to the numbers and the major averages have been drifting somewhat aimlessly. After a three-day 450-point run higher, the Dow Jones Industrial Average has traded in a 65-point range and is flat midday. The overall action in the options market reflects the improved sentiment this week. The CBOE Volatility Index (.VIX) is down .17 to 25.54. Meanwhile, 3.3 million calls and 2.4 million puts traded through 12:00 ET.

Bullish
TIVO is up 15 cents to $7.88 and options action is picking up on talk that a hearing on its patent dispute with Dish Network (DISH) might be canceled. TIVO shares plunged on May 14 after an appeals court had granted the hearing. Today’s talk is unsubstantiated, but seems to have motivated a lot of action in TIVO call options. Players are tuning in to the July 8, July 9, and August 9s. About 12,000 calls and 1,400 puts traded so far. Implied volatility is up 16 percent to 79 as investors wait for further news to drive the stock higher or lower.

Impressive trading activity in Ford Motor (F) Friday. Shares of the automaker are up 20 cents to $10.82 and one investor bought 150,000 September 12 calls. They also sold 75,000 September 14 calls and sold 75,000 September 15 calls. This massive vertical spread is a bullish play, as it makes its best profits if shares rally to $14 through the September expiration. It’s also risky because the entire debit paid is at risk if shares don’t rally beyond $12 during that time.

Bearish
The underlying tone of trading has improved following this week’s rally and trading is now slowing ahead of the summer weekend. Consequently, there are not a lot of bearish stories to write for today. One of the top trades was in the SPDR S&P 500 Trust (SPY) after the September 80 – 60 put spread traded at 30 cents, 40,000X. The massive spread is possibly a type of hedge or “disaster insurance”, as the downside breakeven at expiration is $79.70 (80 minus the debit) and 25.7 percent below current levels. SPY, which is an exchange-traded fund that holds all of the S&P 500 stocks, is up 17 cents to $107.33 midday.

Warner Chilcott (WCRX), an Irish pharmaceutical company, is up 4 cents to $23.22 and options volume is 3.5X the recent average daily, driven by buyers of August 20 puts. One player bought 1,300 at 45 cents each, according to a source on the exchange floor. 2,000 traded total and these put buyers might be looking to hedge positions in shares or speculate that the stock will fall below $20 before the August expiration.

Unusual Volume Movers
Vivus Pharmaceuticals (VVUS) options volume is running 2.5X the usual with 51,000 contracts traded and call volume accounting for about 50 percent of the activity.

Select Sector Discretionary Fund (XLY) options activity is running 3X the usual with 33,000 contracts traded and put volume representing 94 percent of the volume.
Altera (ALTR) options volume is running 2.5X the usual with 10,000 traded and call volume representing 94 percent of the activity.

Unusual volume is also being seen in ACE, Smithfield Foods (SFD), and Johnson Controls (JCI).

Implied Volatility Movers
Madison Square Garden (MSG) implied volatility is falling after two days of increasing options action. The activity started Wednesday amid talk Lebron James might pick the New York Knicks as his next NBA team. However, shares lost 74 cents to $19.64 Friday morning after the basketball star announced plans late Thursday to play for the Miami Heat. MSG fell and, now that the uncertainty is over, implied volatility is down 19 percent to 41.