Bonds Prices on the Move 08-16-2010

Cusick’s Corner
The market is stuck in a tight range on very light trading going into the Midday. Equities are not really tipping either way, so it looks like traders are happy at this stage hanging out in the dog days. But bond traders are busy, the long end of the curve is really on the move today, with yields tumbling and prices going through the roof (this is why the traders are busy, bond yields and price move inversely to each other). If you take a look at TLT, iShares 20yr ETF, it is getting ready to challenge that all-important 110 level. You may want to keep an eye on bonds because if the upside continues, this could spell some potential short-term downside pressure on equities. See you After Hours.

The major averages battled back from early losses and are trading modestly higher midday. The underlying tone of trading remained cautious early Monday after the Dow Jones Industrial Average lost 350 points the week before. The Dow hit a low of 10,210 in early action, down 93 points on the day. However, the morning decline was short-lived and the Dow is now up 17 points and 110 points from its worse levels. There doesn’t appear to be a specific catalyst for the turnaround. The earnings calendar is light and the only report of broad market significance is a report from home improvement retailer Lowe’s (LOW). Shares are up 2 percent after results beat Street estimates. Meanwhile, the day’s economic news was not encouraging. While the latest NY Empire State Index rose a bit less than expected in August (7.10 vs. 7.5 consensus), a separate report showed an index of homebuilder confidence falling to a 17-month low of only 13 (vs. 14 consensus). The data didn’t trigger much of a reaction, however, and trading has been relatively quiet since the morning sell-off. In the options market, the CBOE Volatility Index (.VIX) lost .60 to 25.64 and volume is running about the typical levels, with about 2.6 million calls and 2.5 million puts traded through 12:00 ET.

Bullish
Oracle (ORCL) shares are up 30 cents to $22.96 and trying to recover some of the 7 percent lost last week. In options trading, noteworthy action is being seen in the January 19 puts and January 25 calls, as it appears that an investor paid 15 cents to buy the calls, and sell the puts, 10000X on the International Securities Exchange. ISEE sentiment data indicate that the calls were being bought to open, but not the puts. If so, it’s a bullish trade called a risk-reversal and this investor might also be making the statement that they’re willing to buy ORCL shares at $19 if the stock falls to that level (or less) by January 2011.

Dynegy (DYN), which rallied last Friday on news private equity firm Blackstone is seeking to buy the company at $4.5 per share in cash, is up another 9 cents to $4.62. The fact that the stock is trading above the buyout price seems to suggest that some investors expect a higher bidder to emerge. Meanwhile, December 5 calls have traded 44,800X. It includes a buyer of 10,000 contracts at 20 cents. This strategist might also be looking for a higher offer, something north of $5.20.

Bearish
The education sector is taking another beating after the Department of Education proposed new rules that would penalize companies for graduating students with heavy debt loads. Corinthian Colleges (COCO) is among the casualties. The stock is down $1.39 to $5.27 and options volume is running 3X the average daily, with about 10,000 puts and 9,100 calls traded in the name so far.

Meanwhile, Devry (DV), another education company, is down $3.97 to $38.74 and options volume is running 6.5X the usual, with 3,880 calls and 4,275 puts traded so far. The top trades in DV are part of a bearish risk-reversal, in which an investor bought 2,600 November 35 puts at $2.40 and sold 2,600 November 55 calls at 30 cents. This position looks like a new one and might be a shareholder looking to protect or “collar” an existing position in DV shares.

Unusual Volume Movers
General Mills (GIS) options volume is running 5X the usual, with 31,000 contracts traded and call volume accounting for about 96 percent of the activity.

Netease (NTES) options activity is running 3X the usual, with 12,000 contracts traded and put volume representing 93 percent of the volume.
International Paper (IP) options volume is running 2X the usual, with 12,000 traded and put volume representing 75 percent of the activity.

Unusual volume is also being seen in ValueClick (VCLK), McDermott (MDR), and Consolidated Edison (ED).

Implied Volatility Movers
Strayer Education (STRA) implied volatility is up sharply, as shares sink on concerns about additional regulation of for-profit education companies (see Bearish Flow). Shares plummeted $24.10 to $175.91 and options volume is 10X the norm, with 2,370 puts and 1,284 calls traded in the name so far. Meanwhile, implied volatility surged 23.5 percent to 58, up an impressive 45 percent from a week ago.