Market After Last Week's Rally 07-05-2011

Cusick's Corner
Because of an absence of trading catalysts, the market is likely to stay in a range for the rest of the day and just continue to chop around. This makes the current market a little more difficult to trade, at least from a two-sided perspective. I previously noted that spreading was the strategic approach that I was taking last week and I continue hold that strategic approach. I still have a small S&P put spread on but it has limited exposure from a premium perspective. See you After Hours.

Trading is sluggish and there hasn't been much new information to guide trading after the three-day weekend. With no economic data or earnings releases Tuesday morning, investors didn't have much motivation to drive stocks higher after last week's five-day rally. A report on Factory Orders released at 10:00am ET proved to be a non-event. It showed an increase of .8 percent for May. Economists were looking for 1 percent increase. Meanwhile, action is picking up in some of the commodities markets, with crude oil bubbling $2.11 higher to $97.05 per barrel. Gold gained $28.90 to $1,511.50 an ounce. But on Wall Street, trading is quiet and stocks are mixed at midday. While the Dow Jones Industrial Average is down 5 points, the tech-heavy NASDAQ has added 6 points. CBOE Volatility Index (.VIX) edged up .07 to 15.94. Trading in the options market is a running about the typical levels, with 4.7 million calls and 3.8 million puts traded through 12:45pm ET.

Bullish Flow
Molycorp (MCP) shares are down on a day of sector (AVL, REE) weakness after researchers reportedly found large amounts of rare earth materials in the Pacific Ocean. MCP is off 82 cents to $59.02. Meanwhile, July 55 puts are the most actives in Molycorp Tuesday. 2,317 traded and 82 percent of the flow has been on the bid. July 57.5 puts are also actively traded and also hitting on the bid. Meanwhile, Weekly and July 60 calls are the next most actives and trading predominantly at the ask. The flow appears to be put selling, call buying. MCP shares are down today, but rallied last week after a key rare earth materials plant was delayed due to safety concerns - which fueled expectations about tighter supplies and higher prices.

Bunge (BG), a White Plains, NY agricultural company, has added 68 cents to $70.40 and options volume in BG includes 1,270 puts and 4,130 calls. Typical options volume is 920 calls and 840 puts at midday, according to Trade Alert. The biggest trades of the day are in October contracts, after an investor apparently bought 750 October 72.5 calls at $2.75 and sold 750 October 65 puts at $1.85. They paid a 90-cent net debit for the bullish risk-reversal and appear to be looking for shares to rally through October. Meanwhile, the October 80 calls are the most actives in BG. 2,390 traded.

Bearish Flow
Intel (INTC) shares lost a dime to $22.43 and options volume on the chipmaker through midday is 49,000 calls and 30,000 puts. The top trade of the day is a block of 18,250 August 23 calls sold at 42 cents per contract. One player sold a total of 27,000 contracts. The massive call write was tied to stock and therefore not necessarily a straight bearish play. The next biggest trade in Intel is a 10,000-contract block of July 22 puts bought at 16 cents. The put option is about 2 percent out-of-the-money and open interest is sufficient to cover. So, it might be a closing trade. Or, the put purchase might be a short-term bearish bet. July options expire in 10 days.

A noteworthy trade surfaces in the S&P 500 Index (.SPX) today. The average has battled back from early weakness and is now down just .41 to 1,339.26. In options action, an investor paid $10.30 for an August 1320 - 1280 put spread on the S&P, 20000X. Since the strike prices are 40 points apart, the spread offers a potentially $29.70 payoff (40 - 10.3) if the S&P 500 declines to 1280 through the August expiration, which represents a market decline of 4.4 percent over the next 44 days (commissions excluded).

Unusual Volume
General Mills (GIS) options volume is running 6X the (22-day) average, with 30,000 contracts traded and call activity accounting for 95 percent of the volume.

Suncor (SU) options volume is 2.5X the average daily, with 26,000 contracts traded and call volume representing 85 percent of the activity.

VM Ware (VMW) options volume is running 3.5X the average daily, with 25,000 contracts traded and put volume representing 85 percent of the total volume.

Increasing options activity is also being seen in Regions Financial (RF), Medtronic (MDT), and International Game Technology (IGT).

Implied Volatility Mover
Rediff.com of India (REDF) calls are active and implied volatility is higher today. Shares of the Mumbai-based internet company are up $1.24 to $10.60. It's not clear what's driving shares higher, as there are no obvious company-specific headlines, but bullish call trading is accompanying the rally. 5,460 calls and about 100 puts traded in the name so far, which is 6X the expected for midday. Implied volatility is moving as well, up about 12 percent to 99, as some investors seem to bracing for additional gains in REDF Tuesday morning.