Rollin', Rollin', Rollin' 11-04-2010

Cusick's Corner
Christmas seems to have come early -- major indices are breaking through the April highs. This could be a good time to take an opportunity to roll long positions. Call holders may want to consider rolling up to a higher strike and potentially take profits while keeping bullish sentiment. This might be an equally good time for put holders to close out hedges used as insurance policies, consider rolling the long put up, just in case of a sudden shake out. With the Unemployment number due out in the pre-market, market watchers will keep a close eye on whether or not the employment environment is firming up. See you Midday.

Stocks finished solidly higher Thursday, as investors brushed aside disappointing jobs data and seemed to focus instead on yesterday's Federal Reserve announcement. The rally on Wall Street came one day after Fed officials concluded a meeting on monetary policy and pledged to keep rates low by, among other things, buying back $600 billion in Treasury bonds. Equity markets rallied overseas and the gains set a positive tone for trading in the US. Falling bond yields and higher commodities prices also helped. Meanwhile, the economic news was mixed. A report on third quarter productivity showed an increase of 1.9 percent and better than the .9 percent gain that economists had expected. However, jobless claims numbers disappointed. According to the Labor Department, filings increased by 20,000 to 457K last week and about 12,000 more than expected. The disappointing jobs numbers come the day before the Labor Department releases its key monthly employment report. Yet, investors seemed to shrug off the news and stocks moved broadly higher in morning trading. The rally was extended late and, at the closing bell, the Dow Jones Industrial Average was up 220 points. The NASDAQ had added 37.

Bullish Flow
JP Morgan (JPM) saw a surge in activity late-Thursday. Shares finished up 5.5 percent to $39.80 and led the Dow Jones Industrial Average after Dow Jones Newswires reported that Fed officials are willing to let some major banks increase dividends if they meet certain capital requirements. JPM surged on the news and options volume rose to 2.5X the average daily, with 172,000 calls and 94,000 puts traded on the bank. The top trade printed just as the news hit the wires. A block of 8,400 June 45 calls traded at $1.42 on the ISE. It was an opening customer buyer, according to data from the exchange. November 38 and 40 calls were the most actives in JPM.

Bullish options action was also seen in Carter's (CRI), Ford (F), and Qualcomm (QCOM).

Bearish Flow
Not much bearish activity was seen, as the underlying mood on Wall Street turned remarkably bullish Thursday. One name that did see increasing put volume was MGM. Shares, which rallied 10.4 percent on earnings news yesterday, finished the day up one penny to $12.32. Meanwhile, a noteworthy spread traded in the casino-operator after 22,800 December 15 puts traded at $3.05 and 22,800 December puts at $1.45. While it appears that this spread was sold, open interest data hints at a possible roll. That is, the investor is selling to close a bearish position in the $15 puts and opening a similar position in the $13 puts. If so, they're adjusting a position, but extending bearish exposure in the name. It's possibly to hedge shares.

Bearish flow also picked up in Lincare (LNCR), Novatel (NVTL), and Potash (POT).

Index Trading
At long last, volume is picking up in the index markets. About 1.2 million puts and 872,000 calls traded across the S&P 500 Index (.SPX) and other cash indexes today, according to Trade Alert data. The S&P 500 is trading at its best levels since the fall of 2008 and some investors might now be buying some index puts as portfolio protection. However, the top index trade of the day appears to be a call purchase on the CBOE Volatility Index (.VIX). The volatility index lost 1.04 to 18.52 on the session and a block of 24,000 VIX January 35 calls traded for $1 per contract. This investor might have initiated the purchase on concerns that volatility will make a comeback in the weeks ahead.

ETF Trading
An impressive and well-time spread traded in the Financials Select Sector Fund (XLF) Thursday morning. It was a January 15 – 17 call spread, which traded at 53 cents, 125,000X. Most of the spread traded on the CBOE, but part on the AMEX as well. It appears that a buyer initiated this massive spread in anticipation of gains in the shares through yearend. It's off to a good start. While XLF shares were trading at $14.93 at the time, the fund finished the day up 49 cents to $15.23 thanks to a late-day run higher in JPM (see Bullish Flow). The market for the Jan 15 – 17 call spread is now 70 cents.