Cusick's Corner 08-24-2012

Big Ben holds the bears at bay this morning with his letter to the head of House oversight. At this stage they are words and while you should not trade on rhetoric, you respect it. Do not try to time this "action", i.e. QE, because as with almost every market timer, you could be right at some time but you hope you stay solvent long enough to see it. I am monitoring precious Metals, GLD/SLV, if the ascension continues, I will be watching for some potentially small profit taking into the weekend. See you After Hours.
Stock market averages struggled in early action, but then found some strength mid-morning and are holding gains midday. Losses across Asia's equity markets seemed to set the table for the cautious trading on Wall Street early Friday after Hong Kong's Hang Seng lost 1.3 percent and Japan's Nikkei slipped 1.2 percent. Trading was uninspired in the Eurozone and the only domestic economic stat of the day failed to stir much of a reaction. Orders for Durable Goods were up a better-than-expected 4.2 percent in July. However, stripping out Transportation, orders declined -.4 percent. After four consecutive losses, the Dow Jones Industrial Average again traded lower Friday morning, but then found some strength after the Wall Street Journal posted an article detailing a letter Fed Chairman Ben Bernanke sent in response to Representative Issa, which indicated that the Fed still has further room for policy action. The Dow Jones Industrial Average is now up 63 points and 93 points off session lows. The NASDAQ added 11.5 points. CBOE Volatility Index (.VIX) is off .44 to 15.52. Overall options volumes are running a bit light again today, with about 3 million calls and 2.8 million puts traded across the exchanges through 11:50am ET.
Bullish Flow

Staples (SPLS) woes continue. The stock is down another 5 cents to $10.93 and has suffered an eight-day 18.8 percent total drop since the company reported earnings on 8/15. The stock is at 9-year lows. One player in the options market is possibly anticipating a rebound as a 25,000-contract block of October 13 calls trades on SPLS for a dime per contract. More than 32,000 contracts now traded against just 1 contract of open interest. Overall trading is Staples options is very busy. 42,000 calls and 26,000 puts so far. In addition to the Oct 13 calls, Jan[2014] 10 puts, March 9 puts, Jan 16 calls, March 10 puts, and October 11 calls on Staples are actively traded as well.
Calpine (CPN) adds 14 cents to $17.89 and options on the Houston, TX electric utility are actively traded today. Total volume is running 4X the daily average. About 11,000 calls and only 140 puts traded on the stock so far. September 19 calls, which are 6.2 percent out-of-the-money and expiring in four weeks, are the most actives. October 19, September 18, and October 18 calls are also seeing interest and implied volatility in the options on the stock is moving up 14 percent to 33.5. The stock has seen relative strength this week, up nearly 5 percent, and today's options order flow seems to reflect some expectations that the move can continue.
Bearish Flow

November 31 puts on the iShares FTSE China 25 Fund (FXI) are busy today. One player bought 30,000 contracts for 69 cents per contract, according to a source on the exchange floor. More than 67,000 contracts now traded against about 20,000 in open interest. FXI, which is an exchange-traded fund that holds names like China Mobile and China Life Insurance, is down 20 cents to $34 today and is on an eight-day 3.4 percent losing streak. Some investors might be taking positions in downside puts on FXI on the view that slowing in China's economy will weigh on the nation's equity markets in the weeks/months ahead. HSBC lowered China's 2012 growth forecast to 8 percent from 8.4 percent Friday.
Hovnanian (HOV) is up a penny to $2.67 and November 2 puts on the homebuilder are seeing interest today. The flow has been in smaller lots. The top trade is 100 contracts for 15 cents when the market was 10 to 15 cents. 1,365 contracts have now traded through midday against 7070 in open interest, which is already one of the largest OI positions in the name. Nov 2 puts on HOV are 25 percent out-of-the-money and expiring in 84 days. Some investors might be taking positions on concerns shares will give back some of their recent gains in the weeks/months ahead. HOV is up 43.3 percent since May.
iShares China Fund (FXI) options volume is running 2X the (22-day) average, with 123,000 contracts traded and put volume accounting for 83 percent of the volume.
Eli Lilly (LLY) options volume is 5X, the average daily, with 97,000 contracts traded and call volume representing for 59 percent of the activity. (CRM) options volume is running 2.5X the average daily, with 76,000 contracts traded and put volume accounting for 51 percent of the activity.
Increasing options activity is also being seen in Autodesk (ADSK), Tiffany (TIF), and Safeway (SWY).
Implied Volatility Mover

Eli Lilly (LLY) is up and implied volatility in the options on the stock is falling sharply after a US Court of Appeals upheld the validity of the company's compound used in Alimta, an Alzheimer drug. The stock is up $1.10 to $43.50 in heavy trading of more than 31 million shares. 58,000 calls and 39,000 puts traded in LLY. Jan 45 and Oct 44 calls are the most actives. Meanwhile, levels of implied volatility in LLY options have come down 44 percent to only 14.
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