Window Dressing 09-30-2010

Cusick's Corner
The sellers came in this morning right at strategic levels, 1153 on the DEC S&P e-minis, so we need to see if there is any more window dressing into the After Hours. With the Dollar up, bond yields up and the Aussie pulling back, the shorts seem to have control at this juncture. See you After Hours.

Major averages are lower, as some investors bank profits to end the third quarter after a strong performance in September. After gaining nearly 8 percent month-to-date, the Dow Jones Industrial Average is down 30 points and the NASDAQ lost 8 through midday. The major averages were higher early on positive weekly jobless claims numbers. Before the bell, the Labor Department reported that filings for jobless benefits fell by 16,000 to 453,000 last week. Economists were expecting a decline of about 13,000. Separate data released later showed the Chicago PMI, a gauge of manufacturing activity, up to 60.4 in September, from 56.7 in August and much better than economists projections of 56.0. Yet, the data failed to stir much excitement and profit-taking seems to be the order of the day. Meanwhile, the CBOE Volatility Index (.VIX) added .86 to 24.11. Trading is very active as players square positions to end the third quarter. Approximately 4.4 million calls and 4.1 million puts traded by 12:30 ET.

Bullish
Investors have been dialed in to Sprint Nextel (S) in the past few days. Shares are flat at $4.60 and the focus is on the October and November $5 calls Thursday. The October calls are the most actives. 22,000 changed hands. Another 3,450 November 5 calls traded. November and January 5 call options were active the day before, with 14,850 and 10,700 contracts traded, respectively. Shares are basically unchanged over the past two days, but it seems that investors are buying premium and looking for a move beyond $5 in the months ahead. It might be a play on a Bloomberg report yesterday that noted iPad users are increasingly turning to Sprint after AT&T stopped offering unlimited Wi-Fi plans in June.

Monsanto (MON) shares are off 7 cents to $47.93 and now suffered a four-day 13.5 percent slide. As noted in yesterday's wrap, one player initiated a November 55 – 60 call spread at a 58-cent debit, 5000X in afternoon trading Wednesday. The same trade surfaced again today, but at 54 cents. That is, the investor apparently bought 4,400 November 55 calls at 75 cents and sold 4,400 November 60 calls at 21 cents. This spread is bullish; as it makes its best profits if shares reverse trend and rally back to $60 through the November expiration.

Bearish
DELL is seeing a day of heavy trading. Shares are off 7 cents to $12.92 and in morning action, one investor bought 40,000 November 12 puts and sold 20,000 November 14 calls. The bearish ratio risk-reversal looks like a new position because volume exceeds open interest in both contracts. It's a very bearish play because the strategist is buying 2X as many puts, compared to short calls. It might be a “collar” on an existing stock position. That is, the risk-reversal might have been initiated by a shareholder looking to hedge stock with put options. The premium from selling calls helps pay the cost of the protection. The trade-off is that shares will be called away if the stock rallies beyond $14 through the November expiration.

Some of the top options trades so far today are in the iShares Small Cap Fund (IWM) after a four-legged spread traded in morning action. Shares are off 7 cents to $67.60. The options activity included 20,000 October 64 – 59 puts spreads at 35 cents and 20,000 November 67 – 62 put spreads at $1.36. This looks like a position adjustment. That is, the strategist is selling to close the October put spread, which is out-of-the-money with 15 days until expiration, and buying to open a new position in the November spread, which is only slightly out-of-the-money. In other words, it looks like the rolling of a hedge or bearish bet from one month to the next, up in strike prices.

Unusual Volume Movers
Qualcomm (QCOM) options volume is running 2X the usual, with 119,000 contracts traded and put volume accounting for about 57 percent of the activity.

AIG options activity is running 5.5X the usual, with 101,000 contracts traded and put volume representing 53 percent of the volume.
DELL options volume is 4X the typical levels, with 92,000 contracts traded and put volume accounting for 56 percent of the activity.

Increasing volume is also being seen in TEVA, American Eagle (AEO), and Boeing (BA).

Implied Volatility Movers
American Eagle Outfitters (AEO) implied volatility is moving amid heavy trading in the options market Thursday morning. Shares are up 19 cents to $15.10 and seeing relative strength amid takeover chatter. It's unsubstantiated. Nevertheless, shares are up and options volume is running 4X the usual. About 25,000 calls and 3,000 puts traded on the retailer through midday. Implied volatility is up 8 percent to 42.5.