Rolling Out & Up 08-03-2010

Cusick’s Corner
The market continues to stay in a stubborn range and is currently in the negative at this stage of the Midday. I want to highlight a FRO trade that is in the Bullish section -- a strategist looks to have closed an August 35 call position and bought a January 40 call position, which is referred to as a “roll-out and up”. With FRO trading $31.68, the $35 call strike is out-of-the-money. It is 16 days until expiration, so the strategist is rolling the 35 calls up, being prudent and taking advantage of the remaining premium, which offsets the purchase of the January 40 calls. The strategist gets more time for the stock to get above $40.80, as well as limiting the capital risk to the debit paid to .80 or $80 per contract. For those of you who have front month positions with an underlying hitting resistance, but you’re still bullish (as in the case of the FRO strategist), you can potentially utilize the roll-out and up, mitigating that ugly decay factor that kicks in big time as we get closer to expiration. See you Midday.

The major averages are modestly lower midday on disappointing economic news. Stock index futures fell before the stock exchanges opened Tuesday morning after data showed personal incomes and spending flat during the month of June. Economists were expecting no change in spending, but a .1 percent increase in personal income. Later, data showed factory orders down 1.2 percent in June; which was better than the 1.8 percent drop in May, but worse than the .5 percent decline that economists had expected. A third piece of data showed pending home sales falling 2.6 percent in June. Meanwhile, the day’s earnings news was mixed. While Dow Chemical (DOW) and P&G (PG) are seeing post-earnings weakness, Pfizer (PFE) is helping the Dow Jones Industrial Average with a 5.5 percent rally. Nevertheless, the Dow is down 25 points and NASDAQ is off 8.5 through midday. The CBOE Volatility Index (.VIX) edged up .23 to 22.24. Trading volume is on the light side, with about 3.15 million calls and 2.6 million puts traded through 11:20 ET.

Bullish
Pfizer (PFE) is seeing another day of heavy trading. Shares rallied 5.5 percent to $16.33 and the best gainer in the Dow Jones Industrial Average after the pharmaceutical giant reported a 62-cent per share quarterly profit, which beat Street estimates by a dime. Revenues also topped expectations. Shares are up and 208,000 call options have already traded in Pfizer, which is about 6X the expected for midday. A lot of the activity is in the August 15 and 16 calls, as some players exit positions accumulated in the days leading up to the earnings release. Friday (Weeklys) 15 and September 16 calls are seeing brisk trading as well.

Frontline (FRO) shares are down 22 cents to $31.41 and options volume is running 6X the average daily, being driven by an August 35 – January 40 call spread, traded at 80 cents, 6000X in morning action. The spread looks like a position adjustment where the strategist sold 6,000 of the August 35 calls at a dime per contract and bought 6,000 of the January 40 calls at 90 cents. With the August expiration less than three weeks away, they might be throwing in the towel on hopes for a move beyond $35 by August expiration, and are now positioned for shares of the Bermuda-based shipping company to rally beyond $40 by the January expiration.

Bearish
GE shares lost 3 cents to $16.38 and an interesting trade surfaced in the January 2012 puts Tuesday morning. The focus was on the 15 – 10 (1X2) put ratio spread after a strategist paid $2.10 per contract for 5,000 January $15 puts and collected 68 cents for 10,000 January 10 puts. This ratio spread, at a 74-cent net debit (or 2.10 – 68 x 2) is probably a hedge, as it makes its best profits if shares fall to $10, or almost 40 percent, by the January 2012 options expiration.

Express Scripts (ESRX) edges up 37 cents to $46.94 and options action seems cautious Tuesday after 7,625 puts and 2,035 calls traded in the name. Players are focused on the August and September 45 puts, with 3,145 and 2,000 contracts traded, respectively. The action comes one week after the company reported earnings. In addition, shares came under pressure on July 22 when rival Medco Health Solutions (MHS) reported disappointing results. Shares have since recovered those losses and now these put buyers might be taking positions in anticipation of another move lower in ESRX, possibly a sector play after Aetna (AET) also posted disappointing earnings last week.

Unusual Volume Movers
Dow Chemical (DOW) options volume is running 4X the usual, with 60,000 contracts traded and put volume accounting for about 52 percent of the activity.

Cypress Semiconductor (CY) options activity is running 29X the usual, with 41,000 contracts traded and put volume representing 99 percent of the volume.
Baker Hughes (BHI) options volume is running 6X the usual, with 38,000 traded and call volume representing about half of the activity.

Unusual volume is also being seen in Zions Bancorp (ZION), MasterCard (MA), and VeriSign (VRSN)

Implied Volatility Movers
Kinross Gold (KGC) shares are down and implied volatility higher after the gold miner announced plans to buy Toronto-listed Red Back Mining for $7.1 billion. Investors are also waiting for KGC to report earnings tomorrow morning. The stock is down 90 cents to $15.44 and options volume is 13X the average daily, with about 50,000 calls and 20,000 puts traded in the name so far. Implied volatility is up 11 percent to 41.