Resurgence of Bear in Oil 07-29-2010

Cusick’s Corner
All major indices are running into resistance (as noted in the last two Corners), while Finance, XLF, and Semis, SMH, are both pulling back and have been lagging the market over the last few weeks. Both these segments need to breakout, specifically above the June and July highs if any further upside can continue to materialize. Adding further pressure is the resurgence of the bear in Oil, USO – the correlation between Equities and Oil has been strong since May. If Oil breaks further, USO below $33, this could be negative for Equities. The Euro is holding $1.30 and there’s bullish momentum at this stage, which is also holding Gold, GLD as well. Keep an eye on these key relationships which may potentially signal in front of a large market move. See you After Hours.

The major averages are broadly lower despite positive economic news Thursday. The tone of trading was positive early after the Labor Department reported that jobless claims fell by 11,000 to 457,000 in the week ended July 24. Economists were looking for a smaller drop, of 4,000. The day’s earnings news was mostly upbeat as well, with Sony (SNE), Avon Products (AVP), Southwest Airlines (LUV), and Dow component Exxon Mobile (XOM) out with better-than-expected results. Yet, early gains had faded by late morning and, without a clear catalyst, market action was negative into midday. The Dow Jones Industrial Average is now down 90 points and the NASDAQ has lost 31. The CBOE Volatility Index (.VIX) is up 1.17 to 25.42 and near session highs. Trading volume is picking up from yesterday’s slow pace, with about 3.1 million calls and 2.9 million puts traded through 11:00ET.

Bullish
The top two options trades so far today are in Citigroup (C). Shares of the financial services giant are flat at $4.10 and one strategist buys 23,000 January 2012 calls at the 7.5 strike at 23 cents per contract and sells 22,430 January 2012 puts at the 4 line for 84 cents. This is a bullish “risk-reversal” and this strategist seems to be making the statement that they are willing to buy the stock at $4 if it falls to that level or below through the January 2012 expiration. They’re collecting a 61-cent net credit (as if one put sold for every one call), which the strategist will keep if the stock holds above $4. Substantial profits are also possible if shares rally beyond the $7.5 strike through January 2012.

Range Resources (RRC), a Fort Worth, TX independent oil and gas company, is seeing a second day of active trading. 40,000 calls and 12,000 puts traded in the name yesterday. Another 9,860 calls and 2,050 puts traded so far today. August 40 calls are the most actives. 3,772 traded and 60 percent of the volume has been at the Ask. Another 2,477 August 41 calls traded (86 percent Ask). Like yesterday, it appears that call buyers are initiating the trades and taking positions in anticipation of a move higher in RRC shares. The company reported earnings earlier this week.

Bearish
MetLife (MET) and Prudential (PRU) are seeing bearish action on news Attorney General Cuomo is launching an investigation into life insurance companies. Subpoenas have been served to both MET and PRU related to claims to grieving military family members. In MET, 13,000 puts and 3,585 calls have traded so far. Shares are up 82 cents to $40.12 and much of the focus is on August 35 and 33 puts, with 2,417 and 2,456 contracts traded, respectively.

Meanwhile, Prudential (PRU) is up 62 cents to $56.06 and options volume includes 9,300 puts and 2,125 calls, or 2.5X the recent average daily volume for the insurance company. The action is scattered across August and September puts with strike prices ranging from 49 to 55. Although shares of both companies don’t appear to be reacting to the news, it seems like some players in the options market are concerned about possible volatility in shares of both MET and PRU going forward. MetLife is also due to report earnings after the closing bell.

Unusual Volume Movers
Genzyme (GENZ) options volume is running 5X the usual, with 82,000 contracts traded and call volume accounting for about 65 percent of the activity.

Nvidia (NVDA) options activity is running 2X the usual, with 72,000 contracts traded and call volume representing 63 percent of the volume.
Akamai (AKAM) options volume is running 5X the usual, with 63,000 traded and call volume representing 66 percent of the activity.

Unusual volume is also being seen in Visa (V), Citrix Systems (CTXS), and Consumer Staples Sector ETF (XLP).

Implied Volatility Movers
While MetLife (MET) and Prudential (PRU) are seeing active trading on news NY Attorney General Cuomo is investigating the two companies, ManuLife (MFC) is seeing interest as well. It’s not clear if the activity is related to the Cuomo story, but options volume in MFC is running 18X normal, with 11,000 puts and 345 calls traded so far. Meanwhile, implied volatility has jumped about 23 percent to 42.5.