SPX Breaks Key 1085 Resistance 07-13-2010

Cusick’s Corner
The market likes what it hears from positive beats on the earnings front (AA beat by a penny) and from a positive bond offering in Greece. We have also broken key overhead resistance, 1085 on the SPX, so now we need to keep an eye on these levels and watch the headlines to see if we can hold and potentially build off these positive developments. There have been some interesting option trades that have been popping up in front of earnings -- INTC (read below) and some negative developments -- AAPL (read below). Also today, in Continental Airlines (CAL, $23.93) a strategist potentially picked up some premium by selling two put spreads, selling the 20-18 strike put spreads in both August and September. If the stock stays above the $20 mark at each of these expiration dates, the strategist will keep the credit they received when they sold the spread. The risk is that the stock drops below the strike price, specifically strike price – premium 20-.25=$19.75, but limited to the long strike $18, difference between strikes $2-.25 =$1.75 or $175 of risk. Also, this might be a way to get into a stock at a lower cost basis, $19.75, with limited risk, $18, to the expiration of the options. For more information, go to our Education center and look up bull put spreads. See you After Hours.

Stocks are broadly higher after an upbeat earnings report from Alcoa (AA) helped spark optimism that corporate America can deliver strong profits for the second quarter, despite the ongoing sluggishness in the global economy. AA is up 2 percent and one of twenty-nine Dow stocks moving higher (only Pfizer is in the red) after the company reported earnings that beat Street estimates and also raised guidance for aluminum demand. The results seemed to overshadow the day’s other news, which included the latest Trade Balance numbers. According to the data, the deficit increased to $42.3 billion in May and more than the $39.4 billion gap that economists had predicted. Yet, with earnings season getting underway, the economic data might begin to take a back seat to corporate profit reports. That seems to be the case today, as the Dow Jones Industrial Average has tallied a 160-point gain through midday. The CBOE Volatility Index (.VIX) is off .73 to 23.70 and down for an eighth straight day. Meanwhile, trading is very active in the options market, with about 5.1 million calls and 4 million puts traded through 12:30 ET.

Bullish
Options action is picking up in Intel (INTC) ahead of earnings. The world’s largest chipmaker and component of the Dow Jones Industrial Average is slated to release its results today at the close. Shares are up 36 to $20.93. Options volume includes 129,000 calls and 78,000 puts, or 4X normal for midday. July 20 and 21 calls are the most actives, with 23,100 and 20,550 traded respectively. July 21 puts are busy as well, as investors take positions in anticipation of volatility around the results. July options come off the board this week and after today, have only three days of life remaining.

Alcatel Lucent (ALU) calls are very busy as well. There’s no news on the stock which is up 6 cents to $2.78. Meanwhile, options volume surged to 35X the recent average daily. 68,000 calls and 1,400 puts traded so far. December 3 calls have traded more than 38,000X. September 2.5, December 2.5, January 2.5 and January 3 calls are busy as well. Looks like speculative call buying in anticipation of a turnaround in the stock. Shares are down nearly 20 percent since late April.

Bearish
Apple Computer (AAPL) shares are under pressure on concerns about a possible defect with the new iPhone 4. Consumer Products published a story yesterday saying they cannot recommend the product due to the problem. Shares are down $6.92 to $250.37 today and options trading is brisk, with 205,000 calls and 154,000 puts traded through mid-session. Of the total volume, more than 212,000 contracts have been July options, which come off the board Friday. So, some players are likely taking positions in anticipation of additional news before the weekend.

ProShares Ultra Short (SSO) is up $1.08 to $36.42 and options volume in the leveraged fund is 2X the recent average daily levels. Interestingly enough, most of the action is in the July 35 and 36 puts, which traded 27,100 and 5,910X, respectively. Volume exceeds open interest in both contracts and the bulk of the volume has traded at the offer, suggesting put buyers are opening new positions and bracing for a turnaround before the end of the week. SSO is designed to move twice as much as the S&P 500 and buying puts on the fund represents a bearish market bet.

Unusual Volume Movers
Alcoa (AA) options volume is running 2.5X the usual, with 96,000 contracts traded and call volume accounting for about 60 percent of the activity.

Met Life (MET) options activity is running 3.5X the usual, with 34,000 contracts traded and call volume representing 75 percent of the volume.
Texas Instruments (TXN) options volume is running 3X the usual, with 32,000 traded and call volume representing 75 percent of the activity.

Unusual volume is also being seen in Continental Airlines (CAL), CSX, and Sequenom (SQNM).

Implied Volatility Movers
Vivus Pharmaceuticals (VVUS) implied volatility is easing after the FDA said the company’s QNEXA obesity drug is effective. VVUS is up $1.52 to $12.18 on the news and options volume is 4X the average daily, with 41,000 calls and 58,000 puts traded so far. Implied volatility is down about 10 percent, but remains elevated at 222, as an outside expert panel is due to review QNEXA later this week.