Weird Dynamic at Play 04-15-2011

Cusick's Corner
The market is up, bonds are up, earnings were mixed and the data was in line -- the trend is still strong. Bonds and Equities going up at the same time is a weird dynamic, one that traders are watching closely because this breaks from their contradictory nature that they usually move in opposite directions -- let's see if this dynamic continues into the close. Take a look at the Kraft (KFT) trade (see Bullish Flow); a strategist is getting some long exposure in this consumer staples name, post better core CPI data and in front of the May earnings. It is options expiration and it's busy so I will see you After Hours.

Stock market averages are higher with help from economic news Friday. Data released early showed the Consumer Price Index [CPI], a gauge of inflation at the consumer level, up .5 percent in March, which was in-line with expectations. Meanwhile, the NY Empire State Index of manufacturing activity jumped to 21.7 in April, from 17.5 in March and much better than the 15.0 that was expected. Industrial Production rose .8 percent in March, and .2 percent better than economists had forecast. Finally, the University of Michigan said its index of consumer sentiment rose to 69.6 in April, up from 67.6 and ahead of expectations of 66.0. The strong economic data seemed to overshadow post-earnings weakness in BofA (BAC) and Google (GOOG). The Dow Jones Industrial Average is up 80 points and the tech-heavy NASDAQ Composite gained 8.3. Overall options volume is active due to the options expiration, with 5.2 million calls and 5 million puts traded through 12:15pm ET.

Bullish Flow
Kraft Foods (KFT) is up 40 cents to $33.35 and one of twenty-three Dow stocks in positive territory midday. Shares touched a new 52-week high and have now rallied 8.4 percent during the past month. Meanwhile Kraft options are very busy Friday. 16,000 calls and 4,240 puts traded in the name so far. June 34 calls, which are about 2 percent out-of-the-money, are the most actives. 6,560 traded. June 33 and January 35 calls are seeing interest as well. There's no recent news in the company to explain the rally in the stock or call buying in Kraft. It might reflect expectations for earnings which are due on May 5.

25,000 calls have traded in Sprint Nextel (S). Shares are down 11 cents to $4.85 and the biggest options trade in the phone company is 8,490 April 4.5 calls at 39 cents. It's probably a closing traded because the contract is 35 cents in-the-money and expires after today. 11,090 traded and open interest is 58,952 contracts. Meanwhile, May 4.5 calls are the next most actives. 10,200 traded and, with 73 percent trading at the asking price, some investors might be taking positions ahead of the company's earnings. Sprint is due to release results on April 28.
Bearish Flow

Google (GOOG) is under pressure and options are very heavily traded after the internet search giant reported earnings after the closing bell yesterday. Google reported a quarterly profit of $8.08 per share, which missed Street estimates by 2 cents. Shares are down $40.71 to $537.80 in very volatile trading. Meanwhile, 113,000 calls and 112,000 puts traded in Google today. A lot of the action is in the April 540 puts and calls, which expire today. Some investors are likely closing out positions before the expiration. Others might be taking new positions in reaction to the volatile swing in the stock price today.

Oil Service HOLDRS (OIH) adds 49 cents to $156.46 after crude gained $1.61 to $109.72 per barrel. Meanwhile, in options action, 43,000 puts and 5,800 calls traded in OIH. A lot of the volume is due to a spread trade. In this options play, the investor apparently sold 10,000 April 160 puts at $4 and bought 21,000 May 150 puts at $3.35. The spread was probably rolling activity, or closing out a position in the in-the-money April puts that are ready to expire and opening a new bearish position in the May out-of-the-money put options. OIH, which is a fund that holds shares of oil drilling and oil services companies, has performed well recently, but is down from a 52-week high of $67.37 set earlier this month.

Unusual Volume
Merck (MRK) options volume is running 3X the (22-day) average, with 69,000 contracts traded and call volume accounting for about 70 percent of trades.

Assured Guaranty (AGO) options volume is 9X the average daily, with 47,000 contracts traded and call volume representing for 79 percent of the activity.

American Eagle (AEO) options volume is running 11X the average daily, with 36,000 contracts traded and call volume accounting for 93 percent of the activity.

Increasing options activity is also being seen in MBIA (MBI), BHP Billiton (BHP), and Quicksilver (KWK).

Implied Volatility Mover
CBOE Volatility Index (.VIX) fell Friday. The volatility index hit a morning low of 14.92 and came within striking distance of a 52-week low of 14.86 set in early-February. The 52-week closing low is 15.46 and was set on January 14. VIX is down 1.15 to 15.12 at midday and has now plummeted 51.7 percent since the highs seen on March 16. At that time, fear about the Japan nuke crisis and escalating oil prices due to conflict in North Africa sent stocks skidding. VIX rallied. Recently, however, the "fear gauge" has been drifting lower as investor focus seems to have shifted to domestic news like earnings and economic data. That seems to be the case again today.