Earnings Season Kicks Off 07-12-2010

Cusick’s Corner
Hope you all had a good weekend and are well rested for the kick off of the Q2 earnings season which is shaping up to be a busy one. The market looks to be content at this stage to stay in a tight, whippy range in front of the earnings announcements, but after last week’s action to the upside, shorts look a little gun shy and the big money is starting to look like they are potentially ready to bite into this market. Strategically, this market has yet to break the Bear trend, so the shorts need to tread lightly and the longs need to be mindful that this earnings season could have the potential to lay some duds in the face of some over enthusiastic analyst projections that have not been revised but have been questioned. See you Midday.

Stocks battled back from early losses and are trading mixed midday Monday. The tone of trading was cautious early as investors returned from the weekend to find very little news to guide the market action. The economic calendar is light until the middle the week and a report on Retail Sales Wednesday morning. Meanwhile, the earnings reporting season unofficially kicks off with a report from Dow component Alcoa (AA), due out after the closing bell. The Dow Jones Industrial Average is flat ahead of the news. The NASDAQ is down 2 points. The CBOE Volatility Index (.VIX) slipped .73 to 24.25 into midday. Meanwhile, options volume is running about typical levels. 3.1 million calls and 2.6 million puts traded through 12:30 ET.

Bullish
Select Sector Financial (XLF) are down 3 cents to $14.48 and July 15 call options have seen some action ahead of earnings from Citigroup (C), JP Morgan (JPM), and BofA (BAC) later this week. A block of 115,000 contracts was bought at 8 cents per contract Friday afternoon. Today, another 35,400 traded. With 60 percent traded at the asking price, it looks like call buyers are once again dominating the action. These options are cheap at less than a dime because they are more than 50 cents out-of-the-money and expire at the end of the week.

Pride International (PDE) is up a nickel to $24.69 and options volume in the oil driller is running 10X the recent average daily. Much of the activity is due to one spread trade, where a strategist apparently sold 9000 July 27.5 calls at 10 cents each to buy 9000 August 30 calls at an average of 22.5 cents. This looks like a position adjustment or a roll. That is, the strategist is selling to close a position in the July calls that expire at the end of this week to open a new bullish position in the August 30 calls, which expire in 39 days.

Bearish
Paychex (PAYX) is off 35 cents to $26.09 on news the company’s CEO Jonathan Judge has resigned. Options activity is picking up as well, with 7400 September 25 puts traded so far. The top trade is a block of 2,000 contracts at $1 each and is an opening customer buyer, according to sentiment data. Some investors might be buying put options on concerns that today’s news signals trouble for the Rochester, NY staffing and outsourcing services company.

SPYders (SPY) are down 19 cents to $107.77 and options action is picking up in SPY July puts. The July 108 and 107 puts are the second and third most actively traded options contacts today (behind the Citi July 4 call option.) The July 108 puts have traded 37,400X and the July 107 puts 35,850X. Some investors might be buying short-term puts in anticipation of volatility around key economic reports later this week, which includes retail sales Wednesday morning and the release of FOMC minutes Wednesday afternoon.

Unusual Volume Movers
Lowe’s (LOW) options volume is running 5X the usual with 43,000 contracts traded and call volume accounting for about 91 percent of the activity.

STEC options activity is running 4X the usual with 21,000 contracts traded and call volume representing 66 percent of the volume.
Alcatel-Lucent (ALU) options volume is running 15X the usual with 17,000 traded and call volume representing 96 percent of the activity.

Unusual volume is also being seen in NetApp (NTAP), Yum Brands (YUM), and Southwest Energy (SWN).

Implied Volatility Movers
Implied volatility in Alcoa (AA) is moving higher ahead of earnings. The aluminum maker and component of the Dow Jones Industrial Average reports after the closing bell today. 39,000 calls and 30,000 puts have traded in Alcoa ahead of the news. Meanwhile, implied volatility is up about 6.5 percent to 48.