The Bid is Back 02-03-2011

Cusick's Corner
The VIX is down and trading 16.7 (see Index Trading) -- there's less fear in the marketplace than there was last week. Today's strong economic data and retail sales numbers overshadowed worries over events in Egypt. S&P 500 closed up on the day, nearer the day's highs with no news as a catalyst, just that ever-present bid in force. Some jobs data will be released tomorrow – Unemployment Rate, Nonfarm Payrolls, and Hourly Earnings at 8:30am ET. Consensus estimates are that the Unemployment Rate is 9.5%. Stay on your toes and evaluate if your long stock or ETF holdings need some cheaper protection. See you Friday.

Strong economic data and same-store sales results seemed to overshadow worries about international events Thursday. A number of retailers surprised with better-than-expected January same store sales results early in the day. Costco (COST), The Limited (LTD), and Gap Stores (GPS) were among the names posting solid gains. Meanwhile, the SPDR Retail Trust (XRT) added $1.32 to $47.45, and was also boosted by news reports that BJ Wholesale (BJ) is considering putting itself up for sale. On the economic front, data released before the bell showed weekly jobless claims falling by 42,000 to 415,000 in late-January. Economists were looking for a decline of 32,000. Two separate reports released later were also better-than-expected. The ISM Services Index jumped to 59.4 in January, from 57.1 in December and much stronger than the 57.0 that economists had predicted. Factory Orders rose .2 percent in December, which was also significantly better than the -.6 percent that was expected. Overall, the data and same store sales numbers were generally upbeat and seemed to trump worries about escalating unrest in Egypt and other Arab nations. The Dow Jones Industrial Average battled back from morning losses and closed up 20 points. The tech-heavy NASDAQ added 4.3.

Bullish
Tyson (TSN) calls saw heavy trading ahead of its earnings. The meat producer is slated to release results Friday morning. Shares gained 47 cents to $17.56 today and options volume rose to 6.5X the average daily ahead of the news. The top trade of the day was a block of 2,400 February 17 calls on the 70 cent bid, which might have been a liquidating of in-the-money call options. Beyond that, the flow seemed mostly bullish. The next biggest trades were blocks of February 18 calls at the 35-cent asking price. At the end of the day, 6,580 had traded. Another 6,680 April 19 calls changed hands. Total options volume included 22,000 calls and 4,530 puts, as players were clearly favoring calls options over put options ahead of Tyson's results.

Bullish trading was also seen in Yahoo (YHOO), Abercrombie (ANF), and Kimberly Clark (KMB).

Bearish
China MediaExpress (CCME) had a rough afternoon of trading. As noted in the midday report, shares were trading at $15.83 amid heavy put buying late Thursday morning. The selling gathered additional momentum in the second half of trading after Muddy Waters Research accused the company of a “massive pump and dump scheme.” The stock finished the day down $5.52 to $11.09 and options volume surged. 58,000 calls and 101,000 puts traded in the name today. Meanwhile, the heavy volume and increasing anxiety levels sent implied volatility options up more than 50 percent to 210.

Bearish flow also surfaced in China Agritech (CAGC), Weyerhaeuser (WY), and Saks (SKS).

Index Trading
Volume was light across the index market again today. 358,000 calls and 523,000 puts traded across the S&P 500 Index (.SPX) and other cash indexes, which is only 75 percent of the recent average daily volume, according to Trade Alert data. The CBOE Volatility Index (.VIX) lost .61 to 16.69. Meanwhile, some of the top index options trades of the day surfaced in the VIX midday when one strategist bought 20,000 June 18 puts at $1.15, sold 20,000 June 17 puts at 70 cents, and sold 20,000 June 16 puts at 40 cents. This three-way spread, sometimes called a “Tree”, was initiated for a net debit of a nickel and appears be a bet that VIX will settle near 17 at the June expiration. At that point, the June 18s are worth $1 and the other two contracts expire worthless.

ETF Action
iShares Dow Jones Transportation Average (IYT) saw more volume than usual. This exchange-traded fund tracks the performance of the Dow Jones Transportation Average and finished the day up 44 cents to $91.12. IYT has added 23.4 percent since late-August, as railroad, air freight, and airline companies have performed generally well during that time. Meanwhile, in options action, 4,625 puts and 460 calls traded on the fund today. The activity was led by March 92 – 85 bearish put spreads, which traded 1,700X. It looks like some investors were paying $1.20 to open new positions in the spread, possibly betting that IYT will head towards $85 or below through the March expiration.