Session Pullback After Talk of Filibuster 12-07-2010

Cusick's Corner
The end of day pullback came because there are headlines floating around that Democrats are already looking to block/filibuster the extension of Bush tax cuts. This is the headline risk that we are all going to have to manage in the foreseeable future. Energy will be in the forefront early in the session with Crude Inventories due out at 10:30 ET. I want to see if the Oil sector continues to slide especially if the numbers are bearish. See you Midday.

Stocks opened broadly higher on news that President Obama is extending the Bush tax cuts, but the major averages finished mixed after bond yields saw a dramatic spike Tuesday. With no economic data or earnings of significance to guide the morning action, the table was set for steady trading early on news tax cuts implemented under the Bush administration would be extended an additional two years. Yet, the morning advance stalled after some of the commodities, like gold and crude oil, as well as the euro, gave up early gains and fell into the red. In addition, bonds took a beating Tuesday afternoon. The benchmark ten-year Treasury bond fell in morning trading on concerns tax cuts would add to an already inflated deficit, resulting to additional issuance of Treasurys down the road. The sell-off continued in afternoon action following poor results at an auction of 3-year Treasury notes. At the end of the, the yield on the ten-year had jumped to 3.155 from 2.95 the day before. The Dow Jones Industrial Average also faltered in afternoon action and closed down 3 points, off 92 points from its best levels. The NASDAQ added 3.6.

Bullish Flow
Lyondellbasell Industries (LYB) is not a name you hear very often. The company is a specialty chemical maker headquartered in Rotterdam, Netherlands. Yet, some options traders were focused on the name Tuesday as shares touched new 52-week highs and added 52 cents to $31.60. Options volume hit 10.5X the average daily. Most of the action was driven by one spread trade, in which an investor sold 15,000 December 30 calls to buy 15,000 January 32.5 calls. This looks like a roll of a position opened on December 1 when 20,000 December 30 calls were bought at 90 cents. The stock is up since that time, with help from a friendly recommendation on Jim Cramer's Mad Money show last Friday. The calls were apparently liquidated at $1.72 and $1.73 per contract for a hefty profit today. A new bullish position was opened in the Jan 32.5 calls.

Bullish options action was also seen in Mosaic (MOS), Yamana Gold (AUY) and Sunrise Senior Living (SRZ).

Bearish Flow
The credit card names saw relative weakness Tuesday. Mastercard (MA), for example, lost $6.38 to $246.78. Options volume in MA jumped to 3.5X the average daily, with 17,000 puts and 4,715 calls traded. The top options trades of the day were in the December puts and look like a bearish short-term bet, after one strategist apparently bought 5,000 December 240 puts at $2 and sold 5,000 December 220 puts at 20 cents. The spread, at a net debit of $1.80, was well timed because it has since widened to $2.35.

Bearish flow also picked up in Discover Financial Services (DFS), Gastar Exploration (GST), and Longton Financial (LFT).

Index Trading
NYSE Arca Mini Oil Index (BZJ) saw more action than usual. BZJ is an index equal to 5 percent of the AMEX Oil Index (XOI), which hit a new 52-week high and finished the day up 5.39 to 1158.48 Tuesday. BZJ also touched new 52-week highs and closed up .27 to 57.92. Meanwhile, options volume hit 12.5X the average daily volume, driven by apparent sellers of BZJ January 60 calls on the index. 5000 traded and most were trading on the 75-cent bid. Since volume exceeds the outstanding open interest, this looks like opening call writing and a bet that the index will not move beyond 60 through the January expiration. If it does, the strategist will be on the hook to pay the difference between 60 and the settlement value of the index (X5000 X100).

ETF Trading
Options on the Powershares QQQ (QQQQ) were heavily traded Tuesday. The fund holds the same stocks as the NASDAQ 100 Index (.NDX) and after touching a new 52-week high of $54.52 early, finished the day up 4 cents to $53.88 per share. 321,000 calls and 270,000 puts traded on the exchange-traded fund. The top trade of the day was a block of 50,000 January 57 calls in morning trading at 32 cents per contract. It traded on the International Securities Exchange where sentiment data indicate a customer bought-to-open this massive position. The timing wasn't so great, as shares finished 1.2 percent off their best levels and the contract is now bid at 27 cents.