Market Holds Its Ground 04-07-2011

Cusick Corner
The market braced itself for the news in Japan and has held its ground. But the market is whippy and the fact that it's overbought is looking like it has started to wane, leaving me with uncertainty into the After Hours. I have written over the last few weeks about some strategic approaches -- go to the blog at www.xpoundblog.com to review. Today I want to see if the market can hold critical support levels, 1326 on the S&P 500, let's see if this consolidation in the face of a ton of emotion can hold. See you After Hours.

Stock market averages fell Thursday after another earthquake hit Japan. Trading was steady early after the Labor Department reported that jobless claims fell by 10,000 to 382,000 in the week ended April 2. Economists were looking for a decrease of about 5,000. Meanwhile, Bed, Bath and Beyond (BBBY) shares are up 11.2 percent after the company reported better-than-expected earnings late-Wednesday. Costco (COST), JC Penney (JCP) and handful of other retailers are also helping the sector on upbeat monthly same store sales results. The SPDR Retail Trust (XRT) has added 1.8 percent. The jobless claims and retail sales results seemed to outweigh news that the European Central Bank voted to raise rates Wednesday. However, while trading was steady early, stocks came under pressure in mid-morning action on news of another massive earthquake and tsunami alert north of Tokyo. The Dow Jones Industrial Average lost nearly 100 points, but has since recovered most of the loss and is down 22. The NASDAQ has battled back to positive territory and is up 5 points. The CBOE Volatility Index (.VIX) hit a high of 17.77, but was recently down .12 to 16.78. Overall options volume is running about the typical levels, with 4.4 million calls and 3.9 million puts traded through 12:30pm ET.

Bullish Flow
Some investors are shopping for Costco (COST) call options after the retailer reported a March same store sales increase of 13 percent, which was almost double the expected. COST is up 4.2 percent to $78.15 and the second best gainer in the NASDAQ 100 behind Bed, Bath and Beyond. Meanwhile, 8,340 calls and 3,700 puts traded in Costco so far. April 80 calls, which are now 2.4 percent out-of-the-money and expire at the end of next week, are the most actives. 1,800 traded. Upside call buyers are also showing interest in the May and June 80 call options.

Citigroup (C) April 4.5 call options are the most actively traded equity options contract for a second day. More than 141,000 traded yesterday. Shares have given up early gains today and are flat at $4.60 at midday. Another 101,000 April 4.5 calls have changed hands. The contract is now 10 cents in-the-money and expires at the end of next week. The delta, which measures the price change in the option for every $1 move in the stock, is .75. Some investors might be taking positions in these calls, rather than shares, to participate in the stock's gyrations between now and next week's expiration.

Bearish Flow
Walmart (WMT) is up 12 cents to $53.10 and one of 10 Dow stocks in positive territory midday Thursday. An interesting options trade in the retailer is a May 52.5 - 55 strangle, bought at $1.30, 8000X. That is, the investor bought 8,000 May 52.5 puts at $1 and bought 8,000 May 55 calls at 30 cents. Since the puts are 60 cents out-of-the-money and the calls are $1.80 OTM, this strangle has a negative delta. However, it is not a straight bearish bet. Instead, the strangle is a play on heightened volatility in Walmart shares from now through the May options expiration.

Southwest Airlines (LUV) lost 20 cents to $11.95 and is down almost 6 percent this week, as the airliner faces a number of challenges. Not only is the airline industry grappling with rising fuel costs, but Southwest canceled flights Monday to inspect cracks in fuselage on some of its 737 airplanes. Shares are on a four-day losing streak and a noteworthy options trade today is a seller of a 7700-contract block of May 11 calls at $1.10. The call option, which is 95 cents in-the-money, has traded 10000 contracts. Open interest is 45 and some investors might be selling calls against shares and/or betting that the stock will fall to under $11 through the May expiration.

Unusual Volume
SPDR Retail Trust (XRT) options volume is running 2.5X the (22-day) average, with 98,000 contracts traded and call volume accounting for about 95 percent of trades.

EMC options volume is 4X the average daily, with 63,000 contracts traded and call volume representing for 85 percent of the activity.

National Semi (NSM) options volume is running 13X the average daily, with 53,000 contracts traded and call volume accounting for 99 percent of the activity.

Increasing options activity is also being seen in Fifth Third (FITB), Rare Element (REE), and Eli Lilly (LLY).

Implied Volatility Mover
Tesla Motors (TSLA), a manufacturer of electric vehicles, is seeing relative strength and increased options activity today. Shares are up 5 percent to $27.80 and have now rallied 17.3 percent since a Wall Street analyst upgraded the stock on March 31. Meanwhile, today's options volume includes 15000 calls/725 puts. Implied volatility has also risen. Implied volatility in TSLA options is up 8.5 percent to 64.