Married Put(z) 04-29-2011

Cusick's Corner
Equity markets continue to grind higher and the Big Caps are leading the way. Traders are watching the metals closely, more specifically Gold, GLD, and the strength in this trend is under some pressure. Now this does not mean that we won't get a headline that pops the metal, but Gold's strength to the upside is potentially turning -- my signal would be a RSI turn below 70. What is also interesting is that the Greenback, UUP, looks like it is trying to hold a bottom, but timing this one is tricky at best. While conditions of being overbought and oversold can stick around for a while, as a trader I feel this market is just too complacent. That is why I advocate looking at insurance but also at this stage in the wave, ride it and not try to swim against it. See you After Hours.

Stock market averages are mixed in another day of quiet trading. Earnings were in focus early Friday. While disappointing results from Microsoft (MSFT) and Research In Motion (RIMM) are weighing on the tech sector, a number of other names - including Dow components Merck (MRK), Chevron Texaco (CVX) and Caterpillar (CAT) - are seeing post earnings gains. On the economic front, the day's data didn't hold any bombshells. A report released early showed personal incomes and spending up .5 percent and .6 percent, respectively, in March. Economists were looking for .4 percent and .5 percent. Later, the Chicago PMI, a gauge of regional manufacturing activity, printed at 67.6 in April; down from 70.6 the month before and slightly less than the 68.0 that economists had expected. The final economic stat of the week showed the University of Michigan Consumer Sentiment Index at 69.8 for April, up from an initial reading of 69.6 and in-line with economist estimates. At the end of the day, there weren't any surprises in the data and stocks traded mixed on earnings news early Friday. A modest round of buying interest surfaced in late-morning action. The Dow is now up 66 points and the tech-heavy NASDAQ has added 1.20. The CBOE Volatility Index (.VIX) edged down .05 to 14.57. Overall options volume is light, with 5.1 million calls and 4.1 million puts traded through 12:45pm ET.

Bullish Flow
Cheniere Energy (LNG), a Houston, TX liquefied natural gas [LNG] company, is trading up 35 cents to $9.14 after natural gas added 6 cents to $4.36. Natural gas prices have risen 13.2 percent since April 8. LNG shares seem to be trading in lockstep with the commodity and, today, players in the options are focused on the name. 14,000 calls and 1,725 puts traded in the name so far, which is three times the average daily. December 11 calls, which are 20.4 percent out-of-the-money, are the most actives. 5,125 traded. September 9 and 12 calls are busy as well.

Eastman Kodak (EK) shares lost 10 percent yesterday after the company released earnings that fell short of some expectations. The stock is down another 6 cents to $2.79 today and falling to new 52-week lows. In options action, one investor initiated a May - October 3.5 call spread at 33 cents, 5000X in EK. They sold 5,000 May 3.5 calls and bought 5,000 of the October 3.5 calls. This calendar spread might be a bet that shares will hold below $3.5 through the May expiration in three weeks and then rally from that point forward. Or, it might be a roll - closing out May to open a new bullish position in October 3.5 call options.

Bearish Flow
NRG Energy (NRG), a Princeton, NJ electric utility, is trading up 11 cents to $24.04. Options action is running 3X the recent average daily, after 3,880 puts and 400 calls traded in the name. June 25 puts, which are now 95 cents in-the-money, are the most actives. 3,300 have changed hands and, with 83 percent traded at the ask and existing open interest of only 14 contracts, it looks like buyers are initiating new positions in these puts. The bearish trading might be hedging ahead of earnings. The company is due to release results on May 5.

Russell 2000 Small Cap Index (.RUT) is up 4.65 to 866.20 midday Friday. In morning trading, the May 910 - 920 call spread was seeing some interest. One investor sold the spread 11,500X at 30 cents. That is, they sold the 910s and bought the 920s. The spread has now traded more than 35,000X and appears to be new positioning. It's not really bearish trading, but seems to be bet that the small cap index will hold below 910 through the June expiration, which would represent a 5 percent move over the next 48 days. If so, the call spread writer keeps the 30-cent credit. The potential risk is $9.70 per spread (plus commissions) if the index rallies beyond 920.0.

Microsoft (MSFT) options volume is running 3X the (22-day) average, with 429,000 contracts traded and call volume accounting for about 67 percent of trades.

Sprint (S) options volume is 3X the average daily, with 126,000 contracts traded and call volume representing for 93 percent of the activity.

Goodyear Tire (GT) options volume is running 7.5X the average daily, with 58,000 contracts traded and call volume accounting for 64 percent of the activity.

Increasing options activity is also being seen in SunPower Tech (SPWRA), Williams Companies (WMB), and Occidental Petroleum (OXY).

Implied Volatility Mover
Carmax (KMX) shares are seeing relative strength and call volume is picking up in the car sales company today. Shares are up 3.5 percent to $34.68 and near session highs. No news on the stock, but options volume includes 12,000 calls and 500 puts, which is 7X the normal. Implied volatility is up 4 percent to 29.5, as it appears that premium buyers are dominating the action and looking for KMX to move higher before the May expiration, which is in three weeks from today.