Some Long Positions May Need to Marry Puts 12-02-2010

Cusick's Corner
The market continues to chug along and the Finance sector, XLF, continues to be the offensive leader. While the underlying action has been quite bullish, the option activity has been shifting to a 50/50 puts to calls positioning. What is notable and worth discussing again is that the action is decidedly bullish and in a lot of respects warranted with the latest round of relatively bullish economic and earnings activity. This may blind us to the fact that there has been an enormous run up, 18% in the S&P and 5% in the XLF. At this juncture most traders and investors are more concerned about not missing the boat instead of preserving capital -- cardinal sin #1. Puts are cheap and we have seen that headline risk is a real risk, Korea and EU. So take advantage of the cheap insurance 3-6 months out, may be prudent to marry puts to any bullish position. Watch the put call ratios -- use the Dragon tool to see if strategists start implementing downside insurance. See you After Hours.

Stocks are broadly higher for a second day. Economic data was in focus early after the Labor Department reported that weekly jobless claims increased by 26,000 to 436,000 in the latest period, and about 14,000 more than expected. However, with the euro holding steady and major averages across Europe sporting solid gains for a second day, the tone of trading on Wall Street remained bullish as well. UK's FTSE, France's CAC 40 and Spain's IBEX all gained more than 2 percent. Consequently, the Dow Jones Industrial Average, which surged 250 points Wednesday, moved higher early and the rally was extended after pending home sales numbers showed a much stronger-than-expected increased of 10.4 percent during the month of October. Mostly upbeat same store sales numbers from a various retailers along with a bullish research note on the banks courtesy JP Morgan added fuel to the fire. The Dow is up another 92 points and the NASDAQ has added 22. The CBOE Volatility Index (.VIX) lost 2.07 to 19.29. Overall options volume is busy and reflects the bullish sentiment, with about 5.7 million calls and 3.9 million puts traded through 12:45 ET.

Bullish
Bank of America (BAC) calls are actively traded Thursday. Shares are up 2.9 percent to $11.62 and 360,000 contracts traded through midday. The volume is more than double the unusual and 3X the day's put volume. Like yesterday, the top trades are in the January 12.5 and January 14 calls. In morning trading, one strategist bought 10,768 of the Jan 12.5 calls at 31 cents and sold 10,768 Jan 14 calls at 8 cents. This spread, at a net debit of 23 cents, also traded 50000X yesterday at 16 cents. Since shares are up on the day, the spread has widened to 23 from 16, or by more than 40 percent.

Amkor (AMKR) is seeing action. Shares of the Chandler, AZ semiconductor company have added 23 cents to $7.26 and total options volume is running 3.5X the average daily. 3,150 calls and zero puts have traded on the ticker. January 7.5 calls are the most actives. 2,955 traded and, with nearly all of the volume trading at the asking price, it appears that call buyers are dominating the action and looking for AMKR to move beyond $7.5 through the January expiration. However, the activity might be closing as open interest in the contract is 13,834 and currently the biggest position in AMKR.

Bearish
Las Vegas Sands (LVS) has come under pressure midday Thursday. Shares lost $3.43 to $47.91 after the Macau government rejected the company's request for land grants in Cotai. The news sparked a volatile reaction in LVS shares and options action is heating up as well. 146,000 calls and 89,000 puts traded so far. The Weekly options that expire tomorrow are seeing a lot of interest. For example, the Weekly Friday 12/3 calls at the 50 strike have traded 14,500X. Some investors are likely selling these calls and salvaging remaining time value, as shares are falling more than $2 below the $50 strike price.

The Russell 2000 Index (.RUT) is seeing interest for a second day. As noted in yesterday's closing wrap, the RUT December 790 – 800 call spread saw interest Wednesday. Open interest in both contracts increased by more than 20,000. Today, the index is up 4.50 to 747.64 and a block of 20,525 December 790 calls on the 85 cent bid coincided with a block of 20,525 December 800 calls on the 35-cent asking price. Like yesterday, it looks like this spread is being sold. It's not necessarily a bearish bet. Instead, it seems to be a bet that the index will hold below 790 (which is 5.7 percent above current levels) over the next two weeks and into the December expiration.

Unusual Volume Movers
Lowe's (LOW) options volume is running 4.5X the usual, with 70,000 contracts traded and call volume accounting for 81 percent of the activity, according to data from website WhatsTrading.com.

Aeropostale (ARO) options activity is running 5X the usual, with 27,000 contracts traded and put volume representing 75 percent of the volume.

Tyson (TSN) options volume is 3X the typical levels, with 19,000 contracts traded and put volume accounting for 90 percent of the activity.

Increasing volume is also being seen in Royal Caribbean (RCL), Suntrust (STI), and Kroger (KR).

Implied Volatility Movers
Implied volatility is easing in Mecox Lane Limited (MCOX), as shares try to stabilize after a two-day 51 percent plunge. Shares came under pressure Tuesday after the company's latest earnings report showed falling profit margins due to higher costs. Today, however, the stock is up 84 cents to $7.49 and trading is brisk, with about 3,480 calls and 25 puts traded on the Chinese online retailer. Implied volatility is down about 24 percent, but remains elevated at 95.