M&A Activity Continues 09-27-2010

Cusick's Corner
This has been a whippy session and the market is now off the lows of the day. Heading into the end of the month, September has had quite an impressive rally with the S&Ps up 9% so far in September. Watch for some potential profit taking, some money managers may be looking to potentially dress up their balance sheets. M&A activity also continues, but now it's in the Airlines (FAA), so see if this volatility continues. I will be monitoring if the buying interest picks up into the After Hours.

Trading is lackluster on a slow news Monday. With no economic data to guide the action, the early focus was on the day's story stocks. The news included a merger in the airline sector after Southwest (LUV) made a bid for Air Tran (AAI). Meanwhile, Unilever (UL) made an offer for Albert Culver (ACV) and Walmart (WMT) moved to buy South Africa's Massmart. Yet, the latest round of deal making failed to spark much of a rally on Wall Street. Instead, the Dow Jones Industrial Average opened lower and is down 25 points midday. The NASDAQ lost 9. The CBOE Volatility Index (.VIX) edged up .87 to 22.58 and options volume is on the light side, with about 3.2 million calls and 2.4 million puts traded by 12:30 ET.

Bullish
Dryships (DRYS) shares are seeing relative strength and DRYS calls are seeing action after Morgan Stanley upgraded the dry bulk shipper to Equal Weight from Under Weight. Shares are up 34 cents to $4.46 through midday and about 24,000 calls traded in the name. The volume is 7X the expected and more than 6X the put volume. October 5 calls, which have traded more than 7,000 contracts, are the most actives. October 4, November 5, and December 5 calls are seeing active trading as well.

MGM shares are up 57 cents to $11.24 and are having a good day after the casino operator announced plans to list shares on the Hong Kong exchange. MGM up 55 cents to $11.22 and options volume is double the average daily, with about 38,000 calls and 16,000 puts traded so far. November 11 call options are the busiest with 10,450 contracts traded by midday.

Bearish
The top options trades so far today are in the SPYders (SPY). The exchange traded fund, which holds the five hundred components of the S&P 500, lost 45 cents to $114.37 through midday Monday. The biggest trades include a block of 50,000 Weekly 116 puts that expire on October 1 at $1.86 and a block of 50,000 October 114 puts at $1.75 per contract. This diagonal spread might be a bet that the S&P 500 will perform well this week, moving above the $116 strike, but then fall back below $114 through the October expiration over the following two weeks.

Northern Trust (NTRS), a Chicago-based regional bank, loses 35 cents to $48.29 and today's options order flow includes about 4,000 puts and 105 calls through midday. The top trade is a block of 2024 April 40 puts at $1.62 per contract. 2,532 now traded. October 45, October 50, and November 45 puts are seeing interest well. The action seems to include a mix of put buying and selling. Some players might be adjusting positions after the company said Friday that it would report earnings on October 21, which is after the October expiration.

Unusual Volume Movers
AIG options volume is running 4.5X the usual, with 63,000 contracts traded and call volume accounting for about 67 percent of the activity.

AMR options activity is running 5X the usual, with 58,000 contracts traded and call volume representing 70 percent of the volume.
US Airways (LCC) options volume is 7X the typical levels, with 38,000 contracts traded and call volume accounting for 96 percent of the activity.

Increasing volume is also being seen in Southwest Airlines (LUV), Hertz (HTZ), and LDK Solar (LDK).

Implied Volatility Movers
Amgen (AMGN) implied volatility is moving up on news the company is recalling several hundred doses of Epogen and Procruit on concerns about possible glass flakes that might cause blood clots. Shares are off 30 cents to $56.02 and trading in the options market is brisk, with about 5,330 calls and 10,000 puts traded on the biotech. Meanwhile, implied volatility has risen about 4 percent to 30.