Market Continues Kung Fu Fighting 11-05-2010

Cusick's Corner
The market continues Kung Fu Fighting, and while the Fed intervention seemed quite frightening, those Cats (the Fed) fight with expert timing! (I never thought that I would work this one into the Corner, thanks Doug.) But the Fed seems to have pulled off the greatest timing for easing and in front of what seems to be on the surface, Job growth that is quite pleasing. I want to note that, yes, we still have 9.6% unemployment, but the +160K growth in private sector jobs is the largest in over 3 years. Now the big question is will the Funky men from Chinatown decide it's time to chop it down. The BOJ decided not to get into the fray, not adding any monetary injection going into today. This sudden intervention has made this market skip (to the upside), but could this motion make the weak longs trip? Let's see if the market continues its Kung Fu Fighting into the After Hours, thanks Carl!

Stocks are trading mixed after big gains the day before. The underlying tone of trading remained upbeat early Friday after the Dow Jones Industrial Average rallied 220 points Thursday and after the Labor Department reported a surprise jump in job creation during the month of October. The data showed the US economy adding 151,000 payrolls last month, which was significantly better than the 60,000 increase that economists had expected. The rate of unemployed remained unchanged at 9.6 percent, which was in-line with estimates. Average hourly earnings rose .2 percent and twice as much as expected. However, after the big rally Thursday, the market failed to build on the gains despite the good jobs data. Instead, the Dow Jones Industrial Average is down 18 points and midday. The NASDAQ lost 4. The CBOE Volatility Index (.VIX) edged down another .41 to 18.11. Trading in the options market remains very active, with about 6.5 million calls and 4.3 million puts traded so far.

Bullish
A huge spread traded in Citi (C) options Friday morning. Shares have added a dime to $4.43 amid strength in the banking names after Fed officials signaled yesterday that they will allow some banks to begin paying dividends if they meet certain capital requirements. The news sparked a rally in a number of banking names late Thursday and the momentum spilled over to trading early Friday. BofA (BAC) and JP Morgan (JPM) are the Dow's best gainers. Meanwhile, Citi is trading higher and one player sold 60000 Citi December 4 calls at 51 cents to buy 60000 January 4.5 calls at 28 cents. This massive spread might be a roll, closing out a position in the December 4 calls that are 43 cents in-the-money, to open a new bullish position in January 4.5 calls, which are 7 cents out-of-the-money.

Coventry Healthcare (CVH) shares are rallying and call options are busy after the managed care company reported a quarterly profit of $1.25 per share, which was 58 cents better than Wall Street analyst estimates. The stock is trading up $1.08 to $24.56 on the news and options volume is running 5X the average daily, with 4,670 calls and 40 puts traded on the ticker. December 24 calls are the most actives. 3,100 traded and, with nearly all of the volume trading at the ask, it looks like call buyers are driving the action and looking for shares to perform well through the December options expiration.

Bearish
IShares Small Cap Fund (IWM) saw an interesting four-way put spread Friday morning on the CBOE. According to a source on the exchange floor, one investor sold 47,500 November 70 - 64 put spreads at 28 cents and bought 45,000 December 73 – 68 put spreads at $1.30. This looks like a position adjustment or a roll. That is, the investor is selling to close a position in the November spread to buy a new bearish position (or hedge) in the December options.

A large block of puts traded on the Basic Materials Select Sector Fund (XLB) Friday. XLB is one of nine select sector funds that collectively hold all of the S&P 500 stocks. Shares touched a new 52-week high and are up 8 cents to $36.27 midday. Meanwhile, in morning trade, one player bought-to-open a block of 35,000 January 35 puts at $1.08 per contract. The massive put purchase is likely to hedge exposure to the basic materials sector of the market, which has been the most volatile on the nine sectors in recent weeks.

Unusual Volume Movers
Sandridge (SD) options volume is running 9X the usual, with 69,000 contracts traded and call volume accounting for 89 percent of the activity, according to data from website WhatsTrading.com.

Schlumberger (SLB) options activity is running 2X the usual, with 68,000 contracts traded and call volume representing 79 percent of the volume.

Hecla Mining (HL) options volume is 3.5X the typical levels, with 65,000 contracts traded and call volume accounting for 91 percent of the activity.

Increasing volume is also being seen in US Bancorp (USB), Human Genome Sciences (HGSI), and United Continental (UAL).

Implied Volatility Movers
Green Mountain Coffee Roasters (GMCR) options are actively traded and implied volatility is higher on unconfirmed market speculation that Starbuck's (SBUX) might be looking to partner with GMCR. The chatter comes after partnership talks between Starbuck's and Kraft (KFT) broke down. Today's chatter is unsubstantiated, but seems to be the catalyst for the action in GMCR. Shares have added 92 cents to $34.80 and call volume is running 3X more than normal. About 10,000 contracts traded. Meanwhile, implied volatility is up 7.5 percent to 67 on the session.