July Impressive -- S&Ps Up 6.9% 07-30-2010

Cusick’s Corner
Friday ended flat for the day, capping off an impressive month -- the S&Ps finished July up 6.9%. Some may say that this July move has been on light volume -- yes, but it is summer and what’s been impressive is the overall breadth of this move. The Unemployment number will be the key piece of economic data at the end of next week, but there will probably be more focus on the Retail sector and health of the consumer. Do some homework this weekend and take a look at XRT and RTH, two of the more prominent Retail ETFs. Have a good weekend.

Trading was a little volatile early, but market action slowed and the major averages finished little changed Friday. The tone turned somewhat bearish Friday morning after data showed Gross Domestic Product increasing at a 2.4 percent annual rate in the second quarter, down from 3.7 percent in the first and below economist estimates of 2.5 percent. The early decline was orderly, however, and the major averages found some support around 9:45 ET when data showed the Chicago Purchasing Managers Index at 62.3 in June, and much better than the 56.3 economists were expecting. Separate data showed the University of Michigan at 67.8 in late July, and also better than expectations of 67.5. Stocks seemed to find some support from the numbers and had moved to higher ground through midday. Trading was slow and somewhat choppy from that point forward. At the closing bell, the Dow Jones Industrial Average had traded in a 159-point range, but finished down just 1 point. The NASDAQ added 3.

Bullish Flow
Eli Lilly (LLY), the Indianapolis, Indiana pharmaceutical maker, edged up 15 cents to $35.60 and call option activity picked up noticeably in the name Friday. 11,000 contracts traded, which is double the normal and more than 5X the number of puts that changed hands. The action was focused on the out-of-the-money September and October 37 and 38 calls. August 33 call options saw interest as well. Implied volatility eased about 9 percent to 20.3. The action comes one week after the company reported better-than-expected earnings. Shares are up about 3 percent during that time and now some investors are possibly buying these calls, probably looking for a move beyond $37 or $38 per share in the weeks ahead.

Bullish order flow was also seen in Rambus (RMBS), EBAY, and Geron (GERN).

Bearish Flow
Annaly Capital Management (NLY), a New York-based REIT, finished the day down 11 cents to $17.40 and options volume picked up noticeably in the October 15 and 16 puts. Both contracts traded more than 10,000X. Spread traders appeared to be driving the action. For example, a block of 2,500 Oct 16 puts traded at the 38-cent ask price while, at the same time, a block of 2,500 Oct 15 puts traded on the 18-cent bid. This spread, at a 20-cent net debit, is a bearish bet, as it makes its best profits if shares fall to $15 by the October expiration, which represents a move of about 14 percent.

Bearish flow also picked up in Aruba Networks (ARUN), Quanta Services (PWR), and Emulex (ELX).

Index Trading
NYSE-Arca Mini Oil Index (.BZJ) saw an increase in options activity Friday. The index tracks 1/20th of the AMEX Oil Index (.XOI), which is an index of major oil companies like Exxon Mobile (XOM), Chevron (CVX), and Conoco (COP). BZJ edged up .04 to 48.93 after the XOI added .86 to 978.65. In options action, total volume in the mini-index hit more than 70X the normal. The action was in the September 50 calls. 6500 traded and most of the action was in blocks traded on the 90-cent bid. Looks like call writers are dominating the action and possibly looking for shares of major oil companies to stay in the range in the months ahead. The trade makes its best profits of 90 cents per contract, if BZJ holds below 50 and the calls expire worthless. It carries considerable risk, however, because if the index rallies, the strategist is on the hook to pay the difference, the value of the index minus the strike price of the call (x the multiplier).

ETF Trading
SPYders (SPY), the exchange-traded fund that holds the S&P 500 stocks, finished down 2 pennies to $110.27 Friday. In the options market, a noteworthy spread traded in SPY options when an investor sold 12,200 August 93 – 103 put spreads (selling the 103s and buying the 93s). They also bought 12,200 October 99 – 105 put spread (buying the 105s and selling the 99s). They paid 90 cents for this four-way and this is likely an institution rolling a bearish position or a hedge. The strategist closed out the August spread, which expire three weeks from today, and opened a similar position but at a higher strike in October. They might have expected volatility through August, but are now adjusting their expectations and opening new positions a few months out at higher strike prices.