Market Bubbles then Fizzes 06-21-2011

Cusick's Corner
Plop, Plop, Fizz, Fizz, - oh what a rally relief it is. The market has bubbled up and now pulled off the highs going into the Midday. The Housing data came in a little better than expected this morning but the market into the Midday hit resistance, 1291 on the S&P Continuous future, and is grinding. What has been impressive is the bounce in Tech - AAPL, BIDU, GOOG, AMZN and even RIMM bounced. We also have Financials trading to the upside and they are holding after the JPM settlement announcement with the SEC, $156.3 million on the CDO market. Having these two offensive sectors on the move today has the market in a very positive light. However, the FOMC is in the middle of their two day meeting and what comes out of the decision tomorrow could shed more light on how these summer markets are going to trade. The last three sessions have revealed that there is support, 1250 on the S&Ps, and I suspect we could be looking at a trading range of 1225-1335 on the S&Ps for some time, which could be nirvana for a trader. As I disclosed last week, I am positioned in the S&Ps and with this recent push to the upside, I have made some adjustments, unwound the long deltas up at these levels and now carrying a small short delta position at this stage. See you After Hours.

Wall Street followed European markets higher Tuesday morning. Stock market averages posted solid gains across the Eurozone amid hopes a default of Greek debt will be avoided and the crisis might be contained in the short-term. France's CAC 40 helped pace the advance with a 2 percent gain. The euro rallied .7 percent on the dollar. Meanwhile, the domestic economic news included a report on Existing Homes Sales, which fell to 4.81 million in May. While that was down from 5 million the month before, it was better than the 4.75 million that economists had expected. Now, investors await word from the Federal Reserve. Officials begin a two-day meeting on monetary policy today and issue a post-meeting statement Wednesday afternoon. The tone of trading is relatively upbeat today ahead of the news. The Dow Jones Industrial Average is up 104 points and posting its fourth consecutive gain. The tech-heavy NASDAQ added almost 50. CBOE Volatility Index (.VIX) lost 1.69 to 18.30. Overall options volume is running about the typical levels, with 5.4 million calls and 4.5 million puts traded through 12:45pm ET.

Bullish Flow
GE is up 1.9 percent to $18.84 and one of twenty-six Dow stocks posting gains. Trading in General Electric call options is picking up as well. Volume is 70,000 calls and 44,000 puts, or about double the typical volume through midday. July 19 calls, which are .85 percent out-of-the-money and expiring in 24 days, are the most actives. 30,900 traded. It appears that some investors have been paying 27 cents per contract in recent trade and possibly taking bullish positions on hopes shares will rally beyond $19 over the next few weeks. The company is presenting today at an Aviation conference, which might be the catalyst for the increased activity in GE calls today.

Bank of America (BAC) is also helping the Dow Jones Industrial Average today. Shares of the bank are up 14 cents to $10.73. Options volume in the bank at midday is 89,000 calls and 36,000 puts. The top trade surfaced in morning action when an investor bought a 20,000-contract block of January 12.5 calls at 44 cents each. The contract is 16.5 percent out-of-the-money and volume is now 22,289. Another 11,950 Weekly $11 calls have also changed hands. Today's bullish flow in BAC calls might reflect expectations for a rebound in BofA shares after the 19.6 percent year-to-date decline in the share price. BAC hit a new 52-week low of $10.41 last Wednesday.

Bearish Flow
Exxon Mobile (XOM) is up 1 percent to $80.53 and helping the Dow today, even after crude oil lost 57 cents to $93.06. Morning options trades on the energy giant include a put spread, in which the investor bought 7,500 August 77.5 puts at $1.79 and sold 15,000 August 72.5 puts at 78 cents. This 1X2 put ratio spread looks like a new position and a bearish play on Exxon. It offers a max payout if shares fall to $72.5 through the August expiration, which represents a 10 percent decline over the next 59 days. A shareholder might have initiated the spread to help hedge a stock position.

Puts on the SPDR 500 Trust (SPY) are seeing high volume today. Shares, which hold the same five hundred components of the S&P 500, are up $1.62 to $129.32 on a good day for the US equities market. Meanwhile, 1.08 million puts and 624,000 calls have traded on the ETF. SPY July 125 put is today's most actively traded contract. More than 130,000 have changed hands. Some investors are likely closing out bearish positions as shares rebound for a fourth day. However, others are probably buying puts on concerns about the short-term outlook for the stock market. July options expire in 24 days.

Unusual Volume
Walgreens (WAG) options volume is running 10X the (22-day) average, with 66,000 contracts traded and put volume accounting for 51 percent of the volume.

Dow Chemical (DOW) options volume is 3X the average daily, with 45,000 contracts traded and call volume representing 79 percent of the activity.

TIVO options volume is running 3X the average daily, with 40,000 contracts traded and call volume representing 90 percent of the total volume.

Increasing options activity is also being seen in Adobe (ADBE), Supervalu (SVU), and Nabor's (NBR).

Implied Volatility Mover
Walgreens (WAG) is down $2.24 to $42.94 after the retailer reported better-than-expected earnings and revenues, but said that contract talks with Express Scripts (ESRX) have been unsuccessful. The stock is down and options volume is 11X the average daily levels. 35,000 calls and 37,000 puts so far. Meanwhile, implied volatility has plummeted 22.5 percent to 23 now that the earnings event risk has passed.