Cusick's Corner 05-25-2012

The market has been firm into the Midday and I expect that as we get into the After Hours trade things should quiet down as desks clear out early into the long weekend. As I mentioned last week in the Corner, this has been a tough month so far, but there is still potential at this stage for further pressure. As far as price action is concerned, the broken support level of 1350 on the S&Ps is now resistance. After the Michigan Sentiment number came out -- Consumer Discretionary, XLY, and Industrials, XLI, have firmed and the sentiment seems to suggest that the consumer still has earnings power. See you After Hours.
Market action is mixed and volumes are light heading into the Memorial Day holiday. Steady trading overseas helped set the table for morning strength on Wall Street. European equity markets battled back from midday losses and finished with modest gains, including a .4 percent advance in Germany's DAX and a .3 percent move higher in France's CAC 40. Crude oil ticked up 36 cents to $91.02 per barrel and gold added $8.5 to $1566 an ounce. On the economic front, the Univ of Michigan said its index of consumer confidence improved to 79.3 in late-May, from an initial reading of 77.8 and much better than the 77.5 that was expected. The market showed little reaction to the data and action is rangebound heading into the three-day weekend. The Dow Jones Industrial Average is down 30 points and the NASDAQ is flat. CBOE Volatility Index (.VIX) ticked up .06 to 21.60 amid light volumes in the options market, 2.7 million calls and 2.7 million puts traded across all the exchanges through 12:00pm ET.
Bullish Flow

Interesting spread trading has surfaced in Idenix Pharmaceuticals (IDIX) past two days. The stock is off 22 cents to $9.86 today after a four-day 24.75 percent run higher. Options trades today include a three-way spread, in which the investor apparently sold 8,000 July 7.5 puts on the biotech at 55 cents, bought 8,000 July 12.5 calls for $1.10 and sold 8,000 July 17.5 calls at 20 cents. The spread, for 35-cent debit, traded multiple times yesterday as well and was opening activity, according to today's open interest. In this position, the investor is apparently a willing buyer of the stock at $7 and writing $7 puts, while also taking a position in the out-of-the-money July 12.5 - 17.5 call spread. The company is in settlement talks with Gilead about a Hepatitis C drug and some analysts believe IDIX will receive royalties once an agreement is reached. The bullish spread trading and this week's surge in the stock are perhaps in anticipation of positive news in the case.
Ciena (CIEN) is off 3 cents to $11.92 and has now lost 28.3 percent in a little over a month. One player in the options market seems to be bracing for a rebound, as 2500 June 10 puts were sold on Ciena at 25 cents per contract today and 2,500 June 12 calls bought for 90 cents. The bullish "risk-reversal", for 65 cents, appears to be a new position and, if so, the investor is probably a willing buyer of the stock for $10 and is writing downside $10 puts. They're also buying upside calls for bullish exposure in the name heading into a May 31 earnings report.
Bearish Flow

Verifone Systems (PAY) is reeling and down $7.05 to $37.95 on heavy volume of 17 million shares, which is 10X the normal levels, after the company reported earnings after the closing bell yesterday. The San Jose, CA electronic payment systems company reported second quarter results that exceeded estimates, but shares plummeted on the third quarter guidance. Trading in the options on the stock is heavy as well. 26,000 puts and 9,050 calls so far. June 43 puts, which are now deep in-the-money after today's move, are seeing the most volume. 6,140 traded and some players might be closing out positions on the heels of the stock's big drip. October 40, June 40, and June 36 puts are the next most actives in PAY today.
The largest options trade so far today is in PowerShares QQQ (QQQ), which is down is down 14 cents to $62.01, after one investor sold 40,000 September 62 - 57 put spreads on the ETF at $1.64. The spread possibly rolls a position opened on May 11 when 40,000 September 62 puts might have been bought on the Qs for $2.53. Shares are down 4.1 percent since that time and the position is apparently being liquidated for $3.52. A new position in September 57s is being opened at $1.88 per contract.
Unusual Volume

Verifone Systems (PAY) options volume is running 3.5X the (22-day) average, with 32,000 contracts traded and put volume accounting for 72 percent of the volume.
Idenix (IDIX) options volume is 7.5X the average daily, with 28,000 contracts traded and call volume representing for 70 percent of the activity.
Newfield Exploration (NFX) options volume is running 11 the average daily, with 14,000 contracts traded and put volume accounting for 94 percent of the activity.
Increasing options activity is also being seen in Beazer Homes (BZH), Ivanhoe Mines (IVN), and Owens Corning (OC).
Implied Volatility Mover

Implied volatility in the options on Elan (ELN) is moving up amid strength and high volume in the stock today. ELN is up $1.05 to $14.24 on volume of more than 5 million shares after a company Chairman apparently made comments about Tysabri Alzheimer drug potential and discussed the company becoming a takeover target. Trading in the options on the stock is picking up as well. 12,000 calls and 3,470 puts so far and implied volatility in ELN is moving up 22.5 percent to 57.
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