Bears Grab Control on Heavier Volume 07-16-2010

Cusick’s Corner
The bears grabbed control this expiration Friday. The volume is much higher today, a potential distribution into expiration, plus Gold (GLD -1.90) is getting whacked. This might be more of a technical pullback in the shiny metal but it also has dismissed my hypothesis that we are starting to see the Euro currency and gold correlate. The Euro has garnered some strength and is starting to challenge the $1.30 level. With the market moving down on heavier volume, we need to keep an eye on any afternoon bounce, and then see if it meets some end of day selling and an attempt to take out the 1050. Make sure that with this move in the market, you are reviewing any expiring options and managing both your risk and rewards.

Stocks are broadly lower following another round of poor economic data along with disappointing earnings from the bank sector. Shares of Bank of America (BAC) and Citi (C) both moved lower in pre-market action after the two banks posted stronger-than-expected quarterly profits, but revenues fell short of expectations. Then, the Dow’s early losses were extended in morning trading when a report from the University of Michigan showed its index of Consumer Confidence falling to only 66.5 in July, down from 76 in late June and much worse than the 74.5 reading that economists had expected. The Dow Jones Industrial Average faltered on the news and is down 200 points midday. The tech-heavy NASDAQ lost 57. Trading is very active in the options market, with players scrambling to close or adjust positions ahead of the expiration. About 5.7 million calls and 5.8 million puts traded thus far.

Bullish
Goldman Sachs (GS) is seeing relative strength and options are actively traded after the investment bank settled fraud allegations with the SEC. The settlement is related to the marketing of subprime mortgage securities and Goldman Sachs is paying $550 million. Shares are up $2.93 to $148.15 and total options volume is 3X the average daily on the news, with 122,000 GS calls and 84,000 puts traded so far. The top trades surfaced midday when an investor apparently sold 1,750 October 130 puts at $3.50 to buy the October 160 – 175 call spread at $3.74, 1750X. This bullish trade seems to reflect expectations for a recovery in Goldman’s shares between now and mid-October.

Large blocks of Ford Motor (F) calls traded Friday morning. Like yesterday’s trades (highlighted in the Thursday’s Wrap), the focus is on the September 12 – 14 call spread, after an investor apparently bought 23,170 September 10 calls at 66 cents and sold 23,170 September 14 calls at 16 cents. This spread, at a 50-cent debit, looks like a bullish play (possibly rolling down in strikes) and comes ahead of Ford’s earnings, a week from today.

Bearish
Vivus Pharmaceuticals (VVUS) shares plummeted $6.94 to $5.17 after the biotechnology company failed to win FDA approval for its Qnexa obesity drug. Shares are reeling and options volume includes 71,000 puts and 38,000 call options. July 5 and 6 puts are the most actives and are probably seeing some closing trades ahead of the expiration. Today is the last day to trade the contract. Implied volatility has plummeted from 220 to 90 now that this important event risk has passed for VVUS.

Savient Pharmaceuticals (SVNT), an East Brunswick, NJ biotech, shares lost 55 cents to $13.65 and options volume is twice the average daily, with most of the action concentrated in August 11 puts. 4450 contracts traded through midday. 97 percent of the volume has been at the offer and open interest is only 273, suggesting put buyers are taking positions in the name. It might be a move to hedge shares heading into earnings, due out early August.

Unusual Volume Movers
BofA (BAC) options volume is running 2X the usual, with 548,000 contracts traded and call volume accounting for about 55 percent of the activity.

Google (GOOG) options activity is running 2X the usual, with 127,000 contracts traded and call volume representing 54 percent of the volume.
IShares Silver Fund (SLV) options volume is running 2X the usual, with 65,000 traded and put volume representing 73 percent of the activity.

Unusual volume is also being seen in Nvidia (NVDA), Skechers (SKX) and Mattel (MAT).

Implied Volatility Movers
Google (GOOG) implied volatility is easing, as shares face a post-earning beat-down. GOOG is down $27.87 to $466.15 after the company posted earnings that missed Street estimates. 69,000 calls and 59,000 puts have traded in Google through midday. Meanwhile, implied volatility is down 12 percent to 28.5, now that this earnings event risk has passed.