Interesting Convergence 05-12-2010

Cusick’s Corner
The market has firmed up into the midday with the risk trade, equities, back in play (at least at this stage). There is an interesting convergence -- both the market and Gold are going up simultaneously. These typically are negatively correlated, so with both of these segments moving up together, they need to be monitored. I want to see if there are any pullbacks in the afternoon that are still being met with a bid to continue a pull to the upside. The swings in the market could intensify if these new support levels, SPX 1167, cannot be held. See you After Hours.

The major averages are trading higher on a relatively slow news day. The table was set for morning gains on Wall Street after stock market averages rose across Europe and the latest Trade Deficit numbers held no surprises. According to data released from the Commerce Department early Wednesday, the nation’s trade balance with the rest of the world increased to $40.4 billion in March, from $39.4 billion the month before. Economists were looking for an increase to $40.5 billion. Stock index futures held steady through the data and the Dow Jones Industrial Average saw modest gains in morning action. The advance was extended into midday and the Dow is now up 100 points. The NASDAQ added 35 ahead of earnings from bellwether Cisco Systems (CSCO), due out after the closing bell. The CBOE Volatility Index (.VIX) is down 3.02 to 25.30. Trading in the options market is a bit slower than in recent days, with about 4.5 million calls and 4.1 million puts traded at 12:30 ET.

Bullish
Dell Computer (DELL) is seeing active trading ahead of earnings, next Thursday after market. 38,000 calls and 37,000 puts traded so far. With shares up 20 cents to $15.69, most of the action is in the January 12.5 – 20 “risk reversal”, as it appears some big players have been buying the calls and selling the puts. For example, in morning trading, a 15000-contract block of Jan 12.5 puts traded on the 80 cent bid while 15000 Jan 20 calls traded mid-market at 54 cents. This looks like a bullish play for a 26 cent net debit. If so, this investor is looking for upside in the calls, but might also be willing to buy the stock at $12.50 should shares fall and those puts get assigned at $12.50.

Baidu.com (BIDU) is rallying. Shares are trading post-split (ten-for-one) and hit a new 52-week high Wednesday. BIDU was recently up $6 to $77.52 and options volume is running 10X the average daily. 211,000 calls and 82,000 puts traded so far. The bulk of the action is in the May calls with strike prices ranging from 71 and 80. Some investors are opening fresh positions in the newly-listed contracts and looking to participate in the next move in shares of the Chinese Internet company.

Bearish
A large put buyer surfaced in the SPDR Gold Trust (GLD) Wednesday morning. Shares of the fund are up $1.35 to $122 after gold notched another record high of more than $1,230 an ounce. One player might be looking to hedge recent gains or perhaps speculate on a reversal in gold. They bought an impressive 40,000 June 115 puts at $1.15 each. The premium purchase, which totals $4.6 million, appears to be an opening position because existing open interest is only 6,091.

Wisdom Tree Dreyfus Chinese Yuan Fund (CYB) is seeing interest. Shares of the fund, which are designed to track both money rates in China and the performance of the Yuan against the US dollar, are flat at $25.05 and options volume is running 11X the typical levels. October 24 puts are seeing the bulk of the action, with some players paying 10 cents per contract. A total of 10,000 traded through midday.

Unusual Volume Movers
Lennar (LEN) options volume is running 2X the usual, with 75,000 contracts traded and put activity representing about 92 percent of the activity.

Electronic Arts (ERTS) options activity is running 3X the usual, with 44,000 contracts traded and call volume representing about 85 percent of the volume.

Gap Stores (GPS) options volume is running 3X the usual, with 27,000 traded and call volume representing 99 percent of the activity.

Questar Gas (STR), Louisiana Pacific (LPX), and XL Capital (XL) also have unusual volume.

Implied Volatility Movers
Ctrip.com (CTRP) is up $3.24 to $39.79 after the Chinese Travel company reported a 19-cent quarterly profit, which topped Wall Street estimates by a penny. Revenues also exceeded expectations. Shares rallied and options volume hit 3X the average daily, led by sellers of June 36 and May 35 puts. Implied volatility is crashing down, off about 18 percent to 51.