Premium Rot 12-08-2010

Cusick's Corner
This is a trader's market and the last two sessions have been fodder for short-term swing traders and patient day traders (if there is such a thing). Also, credit spread traders have had some nice consolidation (i.e. range bound) that has allowed the premium to rot out of the last few sessions. The Dollar and Bonds have both firmed up into the Midday and market watchers have been watching these markets very closely, especially with the Buck right at support and the longer term yields firming up post the Fed Purchase, alluding to a potential resistance point in equities for the short-term. See you After Hours.

Major averages have traded in a narrow range and are mixed mid-Wednesday. With no economic data to guide trading, some of the focus remains on the bond market, where Treasurys are falling hard for a second day on yesterday's news of tax cut extensions. The yield on the benchmark ten-year Treasury, which was less than 3 percent late Monday, is now 3.29 percent and near session highs. However, an encouraging 2011 forecast from Home Depot (HD) as well as strength in the financials –JP Morgan (JPM) and BofA (BAC) – are helping to keep the Dow above water through midday. The industrial average has traded in a 60-point range and is up 5 points. The tech-heavy NASDAQ added 7.5. The CBOE Volatility Index (.VIX) lost .21 to 17.78. Trading in the options market is slower than yesterday, but remains active, with about 3.9 million calls and 3.3 million puts traded through 12:00 ET.

Bullish
Walgreens (WAG) shares have added 6 cents to $36.28 and one investor sold a December 35 – 36 call spread at 76 cents, 6000X. In this spread, it appears the investor sold-to-close a position in 6,000 December 35 calls for $1.52 and bought-to-open a new position in 6,000 December 36 calls at 76 cents. Shares are up 7.7 percent since 11/26 and this investor might be banking a profit in the 35s, which are $1.28 in-the-money and opening a new bullish position in the at-the-money December 36 calls. If so, it's a short-term play because December options expire at the end of next week.

An impressive spread trades in Citigroup (C) Wednesday morning. The bank was in the spotlight Tuesday on news the government is selling its remaining stake in Citi for $10.5 billion. Shares are off 2 cents to $4.59 Wednesday morning and the January – March 4.5 call spread was bought at 11.5 cents, 35000X. In this spread, the strategist sold the Jan 4.5s at 25 cents and bought March 4.5 calls at an average of 36.5 cents. This possibly rolls a bullish position out an additional two months. Overall volume in Citi remains very active, with 479,000 calls and 105,000 puts on the tape so far.

Bearish
Homebuilder DR Horton (DHI) is seeing increasing options action. Shares are off 33 cents to $11.11 after a six-day 14 percent run higher. Meanwhile, a block of 6,000 May 10 puts traded at 79 cents per contract on the International Securities Exchange, where sentiment data indicate a new position was bought-to-open. Volume now exceeds 11,000 and some investors might be buying puts to bet on a move lower or to protect recent gains in DHI shares.

The biggest options trade so far today is in the Technology Select Sector Fund (XLK). It was a block of 40,000 January 23 puts and coincided with blocks of 20,000 Jan 22 puts and 20,000 Jan 24 puts. The activity has the hallmarks of a massive butterfly spread (at 10 cents). That is, the investor sold the body (Jan 23s) 40000X and bought the wings (Jan 22 and 24 puts), 20000X. If opening, the spread makes its best profits if shares fall to $23 by the January expiration. XLK, which holds all of the technology names from the S&P 500, is up 6 cents to $24.90.

Unusual Volume Movers
Orexigen (OREX) options volume is running 7.5X the usual, with 86,000 contracts traded and call volume accounting for 66 percent of the activity, according to data from website WhatsTrading.com.

Kohl's (KSS) options activity is running 3.5X the usual, with 59,000 contracts traded and put volume representing 97 percent of the volume.

Lowe's (LOW) options volume is 3X the typical levels, with 58,000 contracts traded and call volume accounting for 50 percent of the activity.

Increasing volume is also being seen in UAL (UAUA), Ciena (CIEN), and Occidental Pete (OXY).

Implied Volatility Movers
Orexigen (OREX) implied volatility is falling after an FDA panel issued a favorable decision for the company's diet pill. OREX is up $4.84 to $9.60 on the news. Options volume includes 61,000 calls and 37,000 puts. December 11 calls are the most actives and, with 50 percent trading on the bid, some sellers are likely liquidating positions on the news. Implied volatility in OREX plummeted more than 60 percent to 100 now that this event risk has passed.