Leaving on a Jet Plane, Will the Market Come Back Again? 02-24-2011

Cusick's Corner
Looks like Colonel Gadhafi is singing a new tune, “I am leaving on a jet plane. I don't know when I'll be back again...” (I never thought I would ever incorporate a Peter, Paul & Mary song.) There are reports that Gadhafi is attempting to flee the country. While the initial market reaction has been muted, in the end these headlines really offered an overbought market an excuse to sell. There is now a new found respect for risk, thanks to $100 oil, which has strategists repositioning, potentially raising some cash and using longer expiration options to participate on the upside – might be a prudent way to position in the market. I will be watching the lows into the Midday and After Hours, if price holds, the bids could reemerge. See you After Hours.

The Dow Jones Industrial Average is under pressure again Thursday amid concerns about the impact of rising crude oil prices on future global economic growth. Crude oil has been bubbling this week on escalating unrest in Libya. While other OPEC members have ample room to increase supplies to offset disruptions from the North African nation, the concern is that spreading violence might disrupt supply from other bigger oil producing countries like Saudi Arabia. Crude oil rallied beyond $100 a barrel early Thursday and April WTI crude is now up $1.39 to $99.49. Meanwhile, the day's domestic news included a better than expected reading on weekly jobless claims (391K vs. 410K consensus) and an in-line reading on Durable Goods (2.7 percent). A third report released later showed New Home Sales at an annual rate of 284K in January, which was down from 325K from the month before and much less than the 310K that economists had expected. The data didn't matter much, as events overseas continue to dominate the financial headlines. The Dow Jones Industrial Average is down another 82 points. However, the tech-heavy NASDAQ is flat. The CBOE Volatility Index (.VIX) edged down .05 to 22.08. The tone of trading in the options market is less defensive than yesterday, with 5.3 million calls and 4.8 million puts traded through 11:45pm ET.

Bullish Flow
A massive spread trades in Houston oil and gas producer Petrohawk (HK) today. Shares are off 14 cents to $20.43 and the January 30 – 35 call spread trades at 53 cents, 20000X. In this spread, the strategist apparently bought 20,000 January 30 calls at 83 cents and sold 20,000 January 35 calls at 33 cents. At 53 cents, this spread is relatively “cheap” because the January 30 calls are almost $10 out-of-the-money. It would take a very big move in HK to yield a profit at the January expiration. However, the spread can be offset at any time prior to the expiration for a profit or loss, which will depend on the action in the stock in the weeks and months ahead.

Ensco (ESV), a British oil and gas company, is trading up 73 cents to $53.80 after the company reported a quarterly profit of 90 cents per share, which trounced analyst estimates by 20 cents. Shares are up and options action is brisk, with 9,280 calls and 2,065 puts traded in the name so far. March 55 calls are the most actives. 3,200 traded and, with 96 percent of the volume trading at the ask, this looks like call buying in anticipation of additional gains in ESV in the weeks ahead. March options expire in 22 days.

Bearish Flow
GM is under pressure and options are actively traded after the auto-maker reported earnings Thursday morning. Although the company beat on earnings and revenues, shares came under pressure mid-morning. GM lost $1.96 to $32.63 and is trading at its lowest levels since the shares IPO late last year. Meanwhile, options are busy. 96,000 calls and 48,000 puts traded in GM so far. The top trade is a block of 5,760 April 32 calls on the $2.65 bid, which might be a liquidating trading on the heels of the news.

Put volume is picking up in Gap Stores (GPS) ahead of earnings. The retailer is due to release results after the closing bell today and shares are flat at $22.33 ahead of the news. Meanwhile, options volume includes 4,515 puts and 2,050 calls. March 22 puts are the most actives. More than 3,000 traded and, with 95 percent trading at the ask and implied volatility up 2 percent to 38, some investors appear to be buying short-term puts, perhaps downside protection, ahead of the news.

Unusual Volume
GM options volume is running 2.5X the (22-day) average, with 140,000 contracts traded and call volume accounting for 66 percent of the volume.

Brocade (BRCD) options volume is 3X the average daily, with 56,000 contracts traded and call volume representing for 60 percent of the activity.

Pulte Homes (PHM) options volume is running 4.5X the average daily, with 36,000 contracts traded and put volume accounting for 86 percent of the activity.

Increasing options activity is also being seen in International Paper (IP), H&R Block (HRB), and Lorillard (LO).

Implied Volatility Mover
Salix Pharmaceuticals (SLXP) implied volatility is falling after the FDA decided that the biotech's XIFAXAN is not ready for approval. Shares tumbled 22.3 percent to $32.21 and options volume is running 9X the average daily, with 17,000 puts and 8,570 calls traded. Implied volatility, meanwhile, has plummeted 40 percent to 51. Although the stock is making a big move, implied volatility is falling now that this important event risk for SLXP has passed.