Market Holding Modest Gains 11-10-2011

Cusick's Corner
The market is choppy and grinding which after the yesterday's move is not surprising. At this stage the market is hovering on support, 1235 on the S&Ps. The leadership to the upside today is in some defensive stocks, IYT, XLI. I want to see if the shorts come in at key levels, 1250 on the S&Ps. See you After Hours.

Stock market averages are holding modest gains following steep losses suffered the day before. On the economic front, data released early Thursday showed jobless claims declining by 10,000 to 390K last week. Economists were expecting 400K. Separate data showed the Trade Balance narrowing to $43.1 billion in September, from $44.9 billion the month before and much better than the $43.1 billion that was expected. A third report showed Import Prices falling .6 percent last month and .5 percent more than expected. Overseas, trading was volatile in Asia after Hong Kong's Hang Seng sank 5.25 percent, but a decline in Italian bond yields helped to ease some of the jitters that sparked Thursday's sell-off on Wall Street. Trading was orderly across the Eurozone and the euro is holding a modest gain on the buck. Meanwhile, Cisco Systems (CSCO) is up 7 percent and helping the Dow recover some of the 389-point loss sustained the day before. The Dow is up 105 points and the NASDAQ gained 5.5. CBOE Volatility Index (.VIX), which surged more than 30 percent yesterday, is down 2.80 points to 33.36. Overall options volume is running about the typical levels, with 3.9 million calls and 4.1 million puts traded across the exchanges through 12:15pm ET.

Bullish Flow
EBAY shares are down 33 cents to $30.85 and options on the online auctioneer are active today, with 24,000 calls and 27,000 puts traded on the stock so far. The top trades are part of a three-way spread. In this strategy, an investor sold 8,400 Jan 27 puts on EBAY at $1.03, bought 5,600 January 30 calls for $3.10 and sold 8,400 January 34 calls at $1.06. In other words, Jan 27 puts were sold at $1.03 to buy the Jan 30 - 34 (2X3) call ratio spread for 98 cents. The complex spread will earn a profit if shares hold above $27, the puts expire worthless, and the credit is kept. Better profits are possible if shares rally, with a max payout if EBAY settles at $34 at the January 2012 expiration. There is additional risk to the downside from this spread because the puts are not covered, and also to the upside because three calls were sold for every two that are bought.

Barnes and Nobles (BKS) shares have been strong this week. Even as the Dow Jones Industrial Average lost almost 400 points yesterday, shares of the bookseller rallied 13.7 percent Thursday and are up another 69 cents to $14.37 today. Options activity is picking up in BKS as well, with 13,000 calls and 400 puts traded on Barnes and Noble so far. The top trades are part of a spread, in which the investor sold 5,000 January 12.5 calls on the stock for $2.85 and bought 5,000 January 15 calls for $1.73. The activity appears to be a roll, or closing out a position in the in-the-money Jan 12.5s after the two-day rally in the stock while opening a new position in out-of-the-money Jan 15 call options.

Bearish Flow
Kohl's (KSS) shares are up $1.59 to $55.88 and outperforming today after the company reported a third quarter profit of 80 cents per share. Analysts were expecting 79 cents. The stock is up and options volume on the retailer is 15,000 puts and 5,150 calls. Much of the put volume is due to one spread trade, after one investor sold 1,500 November 55 puts on KSS at 85 cents and bought 3,000 November 50 puts for 15 cents. The same player also bought 1,500 December 55 puts on the stock at $2.20 and sold 3,000 December 50 puts at 80 cents. This looks like a roll and closing out a position in a Nov 50 - 55 put ratio spread for a 55 cent credit while opening a new ratio spread in the December 50 - 55 put options a 60 cent debit. The strategist might have a bearish view on the retailer and is buying an additional month for the spread to play out. November options expire at the end of next week.

Legg Mason (LM) is trading up 8 cents to $26 and attempting to stabilize from a 6.8 percent slide the day before. Meanwhile, options volume on the Baltimore, MD asset manager is 3X the daily average, with 3,290 puts and 155 calls traded on the stock so far. The top trade is a 383-lot of Dec 26 puts at the $2.05 asking price. 1,203 now traded. December 25 puts are the most actives. 1,627 changed hands. Looks like some investors are buying at-the-money and out-of-the-money December puts on the stock, perhaps reflecting concerns about the outlook for Legg Mason in the weeks ahead.

Unusual Volume
Cisco (CSCO) options volume is running 2.5X the (22-day) average, with 137,000 contracts traded and call activity accounting for 68 percent of the volume.

Green Mountain Coffee Roasters (GMCR) options volume is 3X the average daily, with 172,000 contracts traded and put volume representing 58 percent of the activity.

EBAY options volume is running 2X the average daily, with 51,000 contracts traded and put volume representing 53 percent of the total volume.

Increasing options activity is also being seen in Tanzanian Royalty Exploration (TRX), United Continental (UAL), and McMoran (MMR).

Implied Volatility Mover
Implied volatility in the options on Tanzanian Royalty Exploration (TRX) is substantially higher Thursday. Shares were halted in morning action and are now down $1.18 to $2.24 in heavy trading. Share volume is approaching 15 million, compared to typical volume of about 280,000 shares. Put options volume spiked as well. 34,000 traded. Normal volume through midday is fewer than 150 contracts. Jan 2 puts, which are 24 cents out-of-the-money, are the most actives. 14,700 traded. Meanwhile, heavy volume and the big drop in the underlying stock have implied volatility in TRX options up 68 percent to 177.