TARP "EU" 10-05-2011

Cusick's Corner
Shake out. That's what we saw on the close last night -- weak shorts were washed out on the news that TARPEU is now a potential reality. While the market has held the upside into the Midday, we have to respect the fact that this is a BEAR market. I like the action at this stage, a solid bid with volume and now breaking critical resistance, 1125 most notable level on the S&Ps. I said a few weeks ago that I felt the directional velocity and risk was to the upside and we are seeing it. For me to shift from the Bear trend, I would want to see that 1200-1225 level broken. Until then I am treating this as a respectable bounce catalyzed by the headlines and weak short being squeezed. See you After Hours.

Stock market averages are holding gains with help from economic news Wednesday. Data released before the opening bell showed the US economy adding 91,000 private sector jobs last month. Economists were expecting the ADP report to show an increase of 45,000. The ISM Services Index was released later. The gauge of nationwide economic activity outside of manufacturing slipped to 53 in September, but that was not as bad as the 52.8 that was expected. Solid gains across the Eurozone, which included a 4.9 percent surge in Germany's DAX, helped set a positive tone for trading on Wall Street as well. However, ran out of steam in morning action and the Dow Jones Industrial Average is down 5 points at midday. The tech-heavy NASDAQ is up 20 points. CBOE Volatility Index (.VIX) eased back 1.40 points to 39.42. Overall options volume is well off of yesterday's pace, with 4.8 million calls and 4.4 million puts traded across the exchanges through 12:15pm ET.

Bullish Flow
Yahoo (YHOO) shares are up and options are actively traded on reports the company is sending out financial information to private equity firms and other possible bidders. Shares gained 43 cents to $14.89 on buyout hopes and options volume on Yahoo through midday includes 205,000 calls and 60,000 puts. The top trades are part of a three-way spread, in which the strategist sold 21,500 November 15 calls on Yahoo at $1.51 and bought the November 16 - 17 call spread at 35 cents, 11000X. This might be a roll and closing out a position in the November at-the-money calls after the stock's three-day 13.2 percent rally. The same investor is apparently taking a new position in the spread and looking for the rally to continue through mid-November.

Steel Dynamics (STLD) shares added 34 cents to $10.48 and have now rallied almost 20 percent from a 52-week low of $8.78 set intraday yesterday. Prior to Tuesday, shares of the steelmaker had suffered a 40.2 percent loss since July. Some players in the options market seem to be anticipating additional gains in the weeks ahead, as call activity is picking up in the name. Today's volume of 3,510 calls and 550 puts is about 3X the norm for STLD. November 10 calls, which are now 48 cents in-the-money, are the most actives. 2,040 traded against 304 in open interest. 97 percent of the flow has traded at the ask, indicating buying interest. November 11 and 12 calls on STLD are seeing interest as well.

Bearish Flow
El Paso (EP) shares are trading down and puts on the natural gas producer are actively traded today. Shares are off 19 cents to $17.36 and 19,850 put options have traded on the stock, which is 8X the average daily put volume. The activity includes a buyer of 13,970 January 12.5 puts at 60 cents per contract. 17,640 traded against 4,478 in open interest. Natural gas prices are down today and have fallen more than 25 percent May. Some investors might be buying puts on EP on concerns falling commodity prices will hurt the company's shares and earnings in the months ahead.

A bearish ratio spread trades on the iShares Long-term Bond Fund (TLT) today. The ETF, which holds a basket of longer-term Treasuries, is down $1.04 to $121.40 following better than expected jobs data. Bonds are lower and one strategist seems to expect the weakness to continue over the next two weeks. The investor bought 11,000 October 120 puts on TLT at $2.20 and sold 33,000 October 112 puts at 33 cents. In other words, an Oct 120 - 112 (1X3) put ratio spread was initiated for a $1.21 net debit. The spread will offer its best payoff if shares fall another 9.4 percent to $112 over the next 16 days. It might be a play on Friday's jobs data. The debit is at risk if bonds rally and shares hold above $120 through the expiration. There is additional risk to the downside, as the strategist is short three puts that every put that was purchased.

SPDR Oil Exploration and Production (XOP) options volume is running 3X the (22-day) average, with 74,000 contracts traded and put activity accounting for 69 percent of the volume.

Unusual Volume
Williams Companies (WMB) options volume is 2.5X the average daily, with 53,000 contracts traded and call volume representing 88 percent of the activity.

AMD options volume is running 3X the average daily, with 46,000 contracts traded and call volume representing 71 percent of the total volume.

Increasing options activity is also being seen in Omnivision Technologies (OVTI), El Paso (EP), and Akamai (AKAM).

Implied Volatility Mover
Research In Motion (RIMM) is rallying and implied volatility in options on the Blackberry-marker is up today after an article in UK Independent suggested that Vodafone (VOD) might be interested in RIM. Shares jumped $2.88 to $23.88. Options order flow includes 126,000 calls and 66,000 puts. November 20 calls are the most actives, with 11,800 traded. Meanwhile, implied volatility in options on the stock jumped 16 percent and is elevated at 94.