Equities on the Move 08-29-2011

Cusick's Corner
There is a lot of money on the sidelines; risk is the play early in the new trading week. The leading sector is Finance, XLF, up almost 3% and is being led by the banks. This is an interesting move since Big Ben did not reveal any specific stimulus tools and the market took this speech (which coincidentally mirrored last year's) as Stimulus is coming. But is it? I am not one to count on the stimulus. Technically the market is in challenge mode to the upside; specifically I am watching the S&Ps to break 1200 in their way to a challenge of early August highs of 1220. Momentum is positive and I am not fighting that tide, but keep an eye on Tech, QQQ/XLK, and the Small Caps, IWM -- I want to see the momentum pick up in that sector if a challenge to the upside has a chance. One note on the precious metals side, I have seen Silver, SLV, decouple from Gold, GLD, so I am looking for some potential upside in the Silver trade and with the implied volatility 2x historical volatility, strategists could look at either in-the-money bull call vertical spreads or out-of-the-money call butterflies. See you After Hours.

Stock market averages are holding gains, as the impact from Hurricane Irene is apparently not as bad as some had feared. The New York Stock Exchange opened for trading despite heavy rainfall and transportation disruptions in New York City over the weekend and the Dow Jones Industrial Average rallied more than 150 points at the open. The day's economic news was mixed. Data released early showed personal incomes up .3 percent and spending increasing by .8 percent in July. Economists were expecting increases of .4 percent and .5 percent, respectively. A report on Pending Home Sales, released later, was down 1.3 percent in June and in-line with expectations. Gains across Asia and Europe's equity markets also helped set a positive tone for early trading in the US. Through midday, the Dow Jones Industrial Average has added 194 points. The tech-heavy NASDAQ gained 63.5. CBOE Volatility Index (.VIX) lost 2.59 to 33. Overall options volume is light due to the inclement weather in the Northeast today, with 4.3 million calls and 3.7 million puts traded across the exchanges through 12:30pm ET.

Bullish Flow
Allstate (ALL) shares are up $1.78 to $26.02 and rallying along with some of the other property and casualty insurance companies after the damage from Hurricane Irene was not as bad as some had feared. In early options action, one strategist bought 3,200 September 27 calls on Allstate at 25 cents and sold 3,200 September 23 - 20 put spread at 15 cents. 10 cents was paid on the three-way and it probably closes out positions opened on Friday. The same spread was bought at 35 cents before the weekend. An investor might have initiated the spread to hedge the event risk ahead of the Hurricane and is now taking off the position after the storm has passed.

Eastman Kodak (EK) call options are busy ahead of tomorrow's target date for the ITC to rule in Kodak's patent case against Research In Motion and Apple Computer. Shares are up 15 cents to $3.02 and on a three-day 17.1 percent move higher ahead of the news. Meanwhile, the top options trade in Kodak today is a January 1.5 - 2 call spread, bought at 33 cents, 4000X. That is, the strategist bought 4,000 January 1.5 calls at $1.53 and sold 4,000 January 2 calls at $1.20. It's not necessarily a bullish play, but a bet that shares will hold above $2 through January 2012. If so, the spread will widen to 50 cents. It has traded 8000X on the session.

Bearish Flow
Puts on Silvercorp Metals (SVM) are busy for a second day. In Friday's midday report, we noted increased activity in the October 7 puts on the Vancouver-based mining company. Shares hit a morning high of $8.22 Monday, but have given up the gains and are now down 10 cents to $7.98. Options volume in SVM through midday includes about 14,000 puts and 7,500 calls. September 7 puts, which are 11.4 percent out-of-the-money and expire in 18 days, are the most actives. 1,900 contracts changed hands. October 5, 9 and 10 puts are the next most actives. It's not clear what is driving the two days of bearish flow in SVM, but implied volatility is elevated at 136 percent, suggesting some investors are worried about additional losses in shares in the months ahead.

Overall, it's a very quiet trading day so far Monday. Stock market averages are up and volume is light because of the weather issues in the Northeast. Many institutional investors are out of the office. 1.6 million calls and 1.9 million puts traded on the ETFs today, which is about half the typical volume for options on the exchange-traded funds. One noteworthy trade surfaced in the iShares Small Cap Fund (IWM). Shares are up $2.55 to $71.66 and one investor apparently bought the Sep 70 - 65 put spread on the fund and also sold the Sep 63 - 57 put spread, 10000X. They paid 84 cents for this four-way and appear to be setting up a condor, which would offer its best pay-off if shares fall between $65 and $63 through the September expiration, which is in 18 days.

Unusual Volume
Allstate (ALL) options volume is running 6.5X the (22-day) average, with 73,000 contracts traded and call activity accounting for 84 percent of the volume.

MGIC Investments (MTG) options volume is 2X the average daily, with 16,000 contracts traded and call volume representing 92 percent of the activity.

Marriott (MAR) options volume is running 3.5X the average daily, with 13,000 contracts traded and put volume representing 98 percent of the total volume.

Increasing options activity is also being seen in Silvercorp Metals (SVM), Lorillard (LO), and USG.

Implied Volatility Mover
Monsanto (MON) implied volatility is moving higher amid active trading in options on the chemicals company. Shares came under pressure early and hit a low of $67.93 on reports of a rootworm in corn crops that is developing a resistance to pesticides. Shares have recovered most of the early losses and are down 16 cents to $70.52 through midday. Meanwhile, 10,000 calls and 8,780 puts have traded in Monsanto so far. October 77.5 calls and September 55 puts traded. Implied volatility in MON options was up 11 percent to 39 in early trading.