Reading the Market

Cusick's Corner
The market is as hard to read as my wife is after driving six car pools (we have 5 kids), she comes through the door with a smile on her face at 8:30 pm and asks, "How's your day been?" Holy Jack Nicolson! This market is in a happy place, but now we are at critical levels, retracing over 50% of our August 9, 2011 lows in the S&P 500. This is a battle line to be watched and the reason I would still keep my position sizing to ¼ or ½ normal (by the way, I scaled down when volatility was in the low 40s & now in the low 30s). I want to make clear that this does not mean that I am not positioning bullish or bearish, whether on price or volatility, but it just means that I am taking it easy on risk, giving me some breathing room. I am going to keep a close eye on both Crude which pulled back after inventories build, and Natural Gas, both have a bid and with another potential hurricane, Katia, I will be watching them closely. See you After Hours.

Stock market averages are holding gains with help from strength in overseas markets and hopes for further economic stimulus. Stock benchmarks were mostly higher across Asia and were posting solid gains across Europe before the opening bell sounded on Wall Street. France's CAC 40 Index helped pace the advance after surging more than 3 percent. Germany's DAX gained 2.5 percent and UK's FTSE added 2.4 percent. Stock strength across the Eurozone reflects diminishing concerns about the European debt problems. In the US, focus is on economic news after ADP reported that the US economy added 91,000 private sector jobs in August. Economists were looking for an increase of 100,000. The data comes ahead of the Labor Department's monthly jobs report Friday. Other reports today showed Chicago PMI, a gauge of regional manufacturing activity, falling to 56.5 in August, from 58.8 the month before and not as bad as the 53.0 that was expected. Factory orders rose 2.4 percent in July and .6 percent more than expected. Yet, although some of today's data was better-than-expected, there are growing hopes the Federal Reserve will soon act again to help the economy following a recent batch of mostly disappointing economic data. The Dow Jones Industrial Average is up 96 points and the tech-heavy NASDAQ has added 17.3. CBOE Volatility Index (.VIX) slipped 1.86 to 31.03. After slow trading Monday and Tuesday, overall options volume is picking up and seems to reflect the cautious underlying sentiment, with 5 million calls and 5.9 million puts traded across the exchanges through 12:30pm ET.

Bullish Flow
Sprint Nextel (S) shares are up 25 cents to $3.80 and options on the phone company are busy today after the Department of Justice moved to block AT&T's proposed bid for T-Mobile. Sprint shares took a hit when the deal was announced on March 21 amid concerns about increasing competitive pressures that might result from the merger. Shares are sprinting higher today, however, and options volume in the stock through mid-session includes 89,000 calls and 6,390 puts. September 4 calls, which are 20 cents OTM and expire in 16 days, are the most actives. 31,100 traded. January 5 and 6 call options on Sprint are seeing active trading as well.

AMR, the parent of American Airlines, has added 14 cents to $3.70 and some investors are apparently taking positions in the September 4 call options on the airliner. 16,113 have traded through midday against 9,689 in open interest. The action includes a lot of action at the asking price ranging from 11 to 13 cents. Shares hit a new 52-week low of $3.17 Friday, but are up 4.3 percent so far this week. Some investors might be taking positions in the Sep 4 calls on hopes for additional gains over the next two and a half weeks. AMR has lost a lot of altitude in 2011 and is down 52.4 percent year-to-date.

Bearish Flow
AT&T (T) is down 4.4 percent to $28.32 and the Dow's biggest loser midday Wednesday. Shares came under pressure amid headlines that the Justice Department is moving to block the phone company's proposed merger with T-Mobile. Options volume in AT&T includes 115,000 puts and 73,000 calls so far. The biggest trades were part of a spread, in which the strategist bought 8,600 December 27 puts at $1.16 and sold 17,200 December 24 puts at 50 cents. In other words, a Dec 27 - 24 (1X2) put ratio spread was initiated on AT&T for a 16-cent net debit. It looks like a bearish play targeting a move down to $24 through the December expiration. A shareholder might have initiated the spread to hedge stock.

1.45 million puts and 745,000 calls traded on the SPDR 500 Trust (SPY) today. Shares are up $1.42 to $123.10 and one of the top trades in the fund is a put butterfly spread in the October contracts. In this play, the strategist sold 60,000 October 109 puts at $1.71. They also bought 30,000 October 98 puts at 69 cents and bought 30,000 October 120 puts at $4.14. Therefore, the Oct 98 - 109 - 120 put fly was initiated for a $1.41 net debit, 30000X. It might be a short-term bearish play or perhaps a hedge, as the spread makes its best profits if shares fall to $109 through the October expiration, which represents an 11.5 percent decline in the S&P 500 over the next 51 days.

Unusual Volume
AT&T (T) options volume is running 3.5X the (22-day) average, with 172,000 contracts traded and put activity accounting for 62 percent of the volume.

Sprint Nextel (S) options volume is 3X the average daily, with 94,000 contracts traded and call volume representing 93 percent of the activity.

Alcatel Lucent (ALU) options volume is running 3X the average daily, with 31,000 contracts traded and put volume representing 54 percent of the total volume.

Increasing options activity is also being seen in Suntrust (STI), Dollar General (DG), and American Tower (AMT).

Implied Volatility Mover
CBOE Volatility Index (.VIX) dipped in morning trading and made a run back towards the 30 level. The volatility index hit a morning low of 30.16 and was recently down 2.03 to 30.86. The market's "fear gauge" is set to close at its lowest levels since August 5. The index hit a 15-month high of 48 on August 8, but is down 35.7 percent since that time. Levels of market anxiety have eased considerably over the past two weeks and some players in the VIX pit seem to be betting that the slide will continue in the weeks ahead. October 22.5 and September 25 puts are the most actively traded VIX options today. 192,000 calls and 162,000 puts traded on the product so far.