Right Back Where We Started 08-15-2011

Cusick's Corner
There were multiple merger stories in the news today that helped fuel today's market advance and now stocks have regained their losses that started on August 5th after Standard & Poor's downgrade of US debt. However, economic reports still show a stressed out economy so trading overall was lighter than usual. Retailers will be in the spotlight tomorrow, a few big names like HD and WMT will be coming out with earnings - check out our earnings calendar located under the Research tab. See you Midday.

Stock market averages opened on solid footing and finished near session highs Monday. The table was set for morning gains on Wall Street after European stock indexes and the euro edged higher on optimism that a meeting of German and French political leaders Tuesday will yield decisive plans to ease problems related to the ongoing debt crisis. The domestic economic was less bullish, however, after the NY Empire State Index showed a decline of -7.7 in August, which was well below the -.4 that economists had expected. The latest Homebuilder Sentiment Index for August was unchanged at 15 and in-line with expectations. Yet, news of a major merger in the tech sector seemed to help offset weak economic data. Shares of Motorola Mobility (MMI) surged 55.8 percent after Google (GOOG) made a $12.5 billion all-cash bid for the company. Meanwhile, some of the commodity-related names saw strength after crude oil gained $2.35 to $87.73 per barrel and gold added $22.4 to $1,763.40 an ounce. Thanks to a late-day push, the Dow Jones Industrial Average finished up 214 points and 2 points off its best levels. The tech-heavy NASDAQ gained 47.2.

Bullish
Shares of Autodesk (ADSK), which had suffered a one-month slide of almost 30 percent prior to last Thursday, are on a three-day 6.9 percent winning streak. Shares added 91 cents to $30.09 Monday. Players in the options market appear to be looking for additional upside in shares of the San Rafael, CA systems software maker. Total volume was 3X the recent average daily after 13,000 calls and 2,625 puts traded in ADSK today. The top trade was a 3,815-ocntract block of August 30 calls at the 95-cent asking price. 5,656 traded against 973 contracts in open interest. The contract is 9 cents in-the-money and expires at the end of the week. Some speculators might be taking positions in the contract on hopes for post-earnings rally in shares. The company releases results Thursday afternoon. August 31 calls, August 32 calls, and September 30 calls on ADSK were actively traded as well.

Bullish trading was also seen in Nokia (NOK), Research In Motion (RIMM) and Sony (SNE).

Bearish
Sirius XM Radio (SIRI) shares added 3 cents to $1.90 and a noteworthy options trade in the name today was a block of 40,000 January 2.5 calls sold at 17.5 cents per contract. The Jan 2.5 call on SIRI is 31.6 percent out-of-the-money and 45,500 contracts traded today. Shares are up 15.2 percent over the past week and some investors might be taking advantage of the strength to write out-of-the-money call options. It's not necessarily bearish market action, but reflects the view that shares of the satellite radio operator are unlikely to recapture $2.5 per share through the January expiration. It's also possible that shareholders are writing these calls against stock as part of a covered call strategy.

Bearish flow also surfaced in JP Morgan (JPM), BP, and American Electric Power (AEP).

Index Trading
Trading in the index market remains brisk, even as market action has become much more orderly during the past week. CBOE Volatility Index (.VIX) lost 4.49 to 31.87 and is down in four of the past five trading sessions. The "fear gauge" is now 33.6 percent below the 15-month high of 48 set one week ago. Still, while implied volatility in the index market is easing, volume remains respectable. 1.08 million puts and 676,000 calls traded across the S&P 500 Index (.SPX), Russell 2000 Small Cap Index (.RUT), and other cash index products today. The S&P 500 rallied 25.68 points to 1,204.49 and the most active index contracts were SPX August 1150 and September 1150 put options. These contracts are 4.5 percent out-of-the-money and some investors might be taking off defensive positions after the S&P 500 extended its winning streak to three days and 7.5 percent.

ETF Action
The biggest or largest options trade Monday was in the iShares Small Cap Fund (IWM), which added $1.97 to $71.76. It was a block of IWM 64,000 November 63 puts at $2.35 per contract. It coincided with 32,000 November 69 puts at $4 and 32,000 November 57 puts at $1.32 per contract. Taken together, these three blocks seem to be part of a Nov 57 - 63 - 69 put butterfly spread for a 62-cent net debit. That is, the 63s were sold for the body of the fly and half as many of the 57s and 69s bought for the wings of the spread. If so, it's a bearish play on the ETF. It makes its best profits if shares fall to $63 through the November expiration, which represents a 12.2 percent decline in the Russell 2000 Small Cap Index over the next 95 days.