Earnings Season Kicks Off 10-17-2011

Cusick's Corner
The market traded up to 1230 as I watched my World Series slip away (I am a Brewer fan). The last time we saw this S&P action was on Sept 1st, the market sold off with conviction, much like the action that we see today. While a 14% run in two weeks has extended this market, this pullback is not a surprise and bulls are now salivating, it's a new potential entry point. This is the action that I will be looking for as we go through earnings, and most importantly we may see new leadership, i.e. sell some Tech and look to Financials. Now I am laddering into any position, and I have been doing more "risk on" analysis on this sell off. See you After Hours.

Stock market averages are deep under water on diminishing hopes for a quick resolution to European debt problems. Stock indexes were broadly lower across the Eurozone and the euro lost .7 percent against the dollar Monday after German officials signaled that EU leaders won't have a quick resolution to the debt crisis by an October 23 summit. Policymakers had been pushing for decisive action at that time. In the US, economic data released early showed the NY Empire Manufacturing Index falling to -8.48 in October, which was well below expectations of -4.0. Industrial Production was up .2 percent in September and in-line with expectations. Mergers were also announced after Roche made a bid for Anadys Pharmaceuticals and Kinder Morgan said it was buying El Paso. However, earnings news is weighing on the financials, as both Citi (C) and Wells Fargo (WFC) are trading down on their respective results. The Dow Jones Industrial Average is now off 190 points and the tech-heavy NASDAQ lost 47. CBOE Volatility Index (.VIX) is up 3.96 points to 32.20. Overall options volume is light today, with about the typical levels, with 4.2 million calls and 4.1 million puts traded across the exchanges through 12:45pm ET.

Bullish Flow
Sprint Nextel (S) adds 4 cents to $2.83 and is seeing relative strength today on reports David Einhorn made positive comments about the company. According to Benzinga, the activist investor said that Sprint is attractive with an asymmetrical return potential. Shares saw a modest jump on the commentary midday Monday. The stock might also be benefiting from news out late Friday that the company had its best one-day sales ever with help from its new product line-up - which includes iPhone 4 and iPhone 4S devices. Today's options volume in Sprint is clearly lopsided, with 20,000 calls and 5,340 puts traded on the stock so far. October 3 calls, which are 17 cents out-of-the-money and expiring at the end of the week, are the most actives. Volume is approaching 12,000.

KB Homes (KBH) loses 33 cents to $6.35 and the top options trade on the homebuilder through midday is a 16,000-contract block of November 6 puts at 39.5 cents. The block was sold, according to a source at the exchange. Open interest is 1,740 and so this appears to be a new position. If so, it's not necessarily a bullish play, but a bet that shares will hold above $6 through the November expiration, which represents a 5.5 percent decline over the next 32 days. If not, the put writer is on the hook to buy shares at $6 through the expiration.

Bearish Flow
Nuance (NUAN) loses 7 cents to $23.83 and options volume on the app software developer is 16,000 puts and 5,440 calls, or 5.5X the daily average for the name. The top trade is part of a spread, in which the strategist sold 2,500 April 22 puts at $2.40 and bought 5,000 April 20 puts at $1.70. That is, an April 20 - 22 (2X1) put ratio back spread was bought for $1. The position is opening and possibly to hedges stock, as it makes its best profits if NUAN makes a substantial move below the $20 strike through April. Separately, April 21 puts are being bought on NUAN as well. 2,535 now traded.

Market Vectors Agribusiness Fund (MOO) loses 92 cents to $47.79 and options volume on the ETF is running 8X the daily average, being driven by a block of 10,700 February 40 puts at $1.75 when the market was $1.60 to $1.75. 11,760 contracts now traded against just 7 contracts of open interest. This exchange-traded fund holds a number of agriculture-related companies and includes names like Potash, Monsanto and Mosaic. Some investors appear to be buying puts and looking for shares of companies in the industry to MOOve south through February 2012.

Unusual Volume
Green Mountain Coffee Roasters (GMCR) options volume is running 4X the (22-day) average, with 80,000 contracts traded and put activity accounting for 58 percent of the volume.

Brigham Exploration (BEXP) options volume is 12X the average daily, with 51,000 contracts traded and call volume representing 88 percent of the activity.

El Paso (EP) options volume is running 5.5X the average daily, with 42,000 contracts traded and call volume representing 61 percent of the total volume.

Increasing options activity is also being seen in EMC, USEC (USU), and Pulte Group (PHM).

Implied Volatility Mover
Biogen Idec (BIIB) implied volatility is moving up amid increased options action. Shares of the biotech are down $1.27 to $101.87 and 3,570 contracts traded on the stock so far. Typical volume through midday is about 2,500. The focus is on downside puts, as October 87.5, 97.5 and 100 puts are the most actives. Meanwhile, implied volatility in the options on the stock jumped 30 percent to 63, as some investors appear to be bracing for additional losses in the stock heading into an October 28 earnings report.