Market Waiting on Bernanke Talk 07-21-2010

Cusick’s Corner
Financials are leading the way with positive results from Wells Fargo (WFC) and Morgan Stanley (MS), where both signaled that their trading and credit risks have diminished considerably. This has the market in a tight choppy range into the Midday and with the Fed Chief talking this afternoon, the market seems to be on hold for his comments. There was an interesting trade in Bank of America (BAC) where a strategist sold the September $12 puts (risk you own the stock at $12 if the stock is below the strike at expiration) and bought the $15 calls (looking for a bounce above $15.10), which is a bullish play and often referred to as a Risk Reversal. This is a potential strategy for those who may be bullish and/or want to potentially own the stock at a discount. See you After Hours.

Stocks are trading mixed following a heavy dose of earnings news Wednesday. With no economic data to guide the morning action, the focus was predominantly on corporate profits. Apple Computer (AAPL) shares rallied $7.41 to $259.30 per share after its earnings beat Street estimates. Meanwhile, Coca Cola (KO) is helping the Dow Jones Industrial Average and Morgan Stanley (MS) gave the financials a lift on stronger-than-expected profits. However, disappointing results from Yahoo (YHOO) and Seagate (STX) are weighing on the tech sector. While the Dow is up 18 points midday, the tech-heavy NASDAQ is down 1.00. No economic data is scheduled for today, but attention will shift to Federal Reserve Chairman Bernanke later today. The Fed head begins two days of testimony on the economy on Capitol Hill. The CBOE Volatility Index (.VIX) is up .35 to 24.28 ahead of the news. Overall options volume in running about the normal levels with 3.7 million calls and 3.2 million puts traded through 12:45 ET.

Bullish
Yahoo (YHOO) is down $1.23 to $13.97 and options volume is 4.5X the average daily after the Internet giant reported strong second quarter earnings, but revenues fell short of expectations and the company offered in-line guidance for the third quarter. About 71,000 calls and 76,000 puts traded in the name. The biggest trades of the day seem to reflect expectations for a rebound, as one bold investor bought 35,000 January 16 calls at 64 cents and sold 35,000 January 12.5 puts at 77 cents per contract. This massive “risk-reversal” was tied to a position in 2.2 million shares of Yahoo stock and represents a substantial bet that Yahoo shares will move higher through the January 2011 options expiration.

Anadarko Petroleum (APC) adds 26 cents to $46.40 and options action includes a block of 10,000 January 57.5 calls, bought at $1.67 each. Open interest is 33,000 and so this might be closing activity. If so, it likely exits some short positions opened as part of July 47.5 – 57.5 call spreads initiated on June 9 and June 22. If so, this strategist is closing out the short side of the trade, and holding the June 47.5 calls in anticipation of additional gains in the oil driller. APC is up 28.6 percent month-to-date.

Bearish
Wynn Resorts (WYNN) added 88 cents to $84.13 after the company said that its Vegas revenues increased by 1.7 percent in the second quarter. However, the casino operator also said losses rose to $17.2 mln (from –8.4 mln) and Average Daily Rates declined to $197 from $218. The news seems to have stirred up some bearish sentiment, with some players paying $2.10 for August 85 – 80 put spreads in morning trading. The company is due to release its full results later this month.

Cemex (CX) lost 4 cents to $9.66 and volume is 2.5X the average daily, with 5,950 puts and 400 calls traded on the session. The January $5 puts are the most actives, with 5100 traded. It includes two blocks of 2000 and 2500 traded at the 70-cent asking price. Looks like an opening buyer of deep out-of-the-money puts, buying “disaster insurance” on the Mexican cement company. It might be hedging activity ahead of earnings, due out later this month.

Unusual Volume Movers
Morgan Stanley (MS) options volume is running 3X the usual, with 89,000 contracts traded and put volume accounting for about 54 percent of the activity.

Coca Cola (KO) options activity is running 3.5X the usual, with 67,000 contracts traded and call volume representing 80 percent of the volume.
US Airways (LCC) options volume is running 3X the usual, with 33,000 traded and call volume representing 89 percent of the activity.

Unusual volume is also being seen in Juniper Networks (JNPR), Abbott Labs (ABT), and Western Digital (WDC).

Implied Volatility Movers
Apple Computer (AAPL) implied volatility is falling after the company reported strong earnings and shares rallied for a second day Tuesday. AAPL is up $6.82 to $258.71 and has added more than $13 over the past two days. Shares are trying to battle back from a one-month $29 per slide and have now retraced about 45 percent the loss in just two days. Meanwhile, trading in the options market is very active, with 227,000 calls and 143,000 puts traded in the name. Implied volatility is plummeting 15 percent to 33, as this earnings event risk has passed and shares stage the impressive two-day bounce.