Hope 10-10-2011

Cusick's Corner
"Hope" -- is the operative word out of the EU as some solution for the distressed Banks. While the fact that Germany and France are talking might be enough to get the under-invested longs into the market, we are still in the range, 1100-1200 on the S&Ps, and the headline risk and bear trend are the reality. But as I pointed out today on CNBC, it does not mean that we cannot participate and one strategic approach is the in-the-money debit spread. Now I discussed an idea that if you were bullish on the banks and going into earnings, if you did not want to buy the stock then you could buy the in-the-money call spread instead. For example if we were looking at JPM, we could consider buying the Nov 30 strike calls for $3.50, and simultaneously sell the 32 strike calls for $2.40 for a net debt of $1.10 or $110 a spread contract. If the stock stays above the $32 level, you have a profit potential of $90 and the max risk of $110. This is referred to as an in-the-money bull call spread, and is a solid strategy for a conservative trader/investor who is bullish and wants to mitigate the volatility, JPM is almost 2X historical vol, by using this spread. See you After Hours.

Stock market averages are holding solid gains on Columbus Day. A rally across the Eurozone after German and French officials reached agreement over the weekend on bailout funds for troubled banks helped set the table for a morning rally on Wall Street. Germany's DAX paced the advance with a 3 percent gain and the euro surged more than 2 percent against the buck. Some of the commodities also got a lift on hopes for the global economy. Crude oil added $2.80 to $85.78 per barrel and gold rose $34.2 to $1670 an ounce. Meanwhile, the Dow Jones Industrial Average is up 265 points and the tech-heavy NASDAQ gained 71.5. CBOE Volatility Index (.VIX) lost 1.91 points to 34.30. Overall options volume is slow due to the Columbus Day holiday (bond market is closed Monday). 4.6 million calls and 4.4 million puts traded across the exchanges through 1pm ET.

Bullish Flow
Cisco Systems (CSCO) is up 2.4 percent to $17.06 and is one of thirty Dow stocks trading higher through midday. CSCO has now rallied 28.3 percent off the 52-week lows set two month ago. The stock hit a low of $13.3 on August 9. Today's options flow in Cisco includes 78,000 calls and 47,000 puts. Trading is brisk in October 17, November 18 and November 20 calls. April 18s are the most actives. The action includes a block of 8,554 at $1.20 and data from the exchange indicate an investor sold-to-open a position. 14,770 now traded. Some shareholders might view the recent strength in Cisco shares as an opportunity to sell upside calls and generate some income from stock positions. If shares settle above $18 (+5.5%) and the position is held through the April expiration, the stock will be called away at the $18 strike price.

Celgene (CELG) rallied to a new 52-week high and options on the biotech are actively traded after RBC raised the stock to Outperform on valuations, earnings growth and a strong product pipeline. 18,000 calls and 5,815 puts traded on the stock. Shares are up $3.05 to $66 and October 67.5 calls, which are now $1.5 out-of-the-money, are the most actives. 3,550 traded. October 65, October 70 and November 67.5 calls are seeing interest as well. Players seem to be taking positions in calls on CELG after the upgrade on hopes the momentum can continue to lift shares in the days ahead. October options expire in 11 days.

Bearish Flow
Sprint Nextel (S) loses 20 cents to $2.12 and was one of only two losers within the S&P 500 Index Monday morning. BMC was the other. Sprint shares are down today on multiple analyst downgrades and after S&P put the company on credit watch negative. Options in Sprint are actively traded. The top trade is a 2,555 contract block of October 3 calls on the 4-cent bid. May 3.5 calls are the most actives. With more than 10,000 traded. January 3.5 calls are seeing interest as well. Looks like call sellers are active in the name and attempting to salvage remaining time value in these calls - as Sprint shares slide and the contracts fall deeper out-of-the-money.

A hefty put spread trades in the SPDR 500 Trust (SPY) Monday morning. Shares are up $3.24 to $118.95 on a good start to the week for the US equity market. In options trading, one player bought 45,000 October 115 puts on the "SPYders" in morning trading at $1.59 and sold 45,000 October 111 puts at 74 cents. In other words, an Oct 115 - 111 put spread was initiated at 85 cents, 45,000X. The spread is a bearish one, as it reaps its best payoff if shares fall to $111 through the October expiration, which represents a 6.7 percent market decline over the next 11 days. An institutional investor might have initiated the spread to hedge a stock portfolio.

Unusual Volume
Sprint Nextel (S) options volume is running 2X the (22-day) average, with 92,000 contracts traded and call activity accounting for 79 percent of the volume.

iShares Japan Fund (EWJ) options volume is 5X the average daily, with 62,000 contracts traded and call volume representing 100 percent of the activity.

Plains Exploration (PXP) options volume is running 6X the average daily, with 33,000 contracts traded and call volume representing 65 percent of the total volume.

Increasing options activity is also being seen in Level 3 (LVLT), Staples (SPLS), and Lorillard (LO).

Implied Volatility Mover
Harbin Electric (HRBN) shares are trading lower and implied volatility is moving higher Monday. Shares of the Chinese electrical equipment maker are down $1.15 to $20.02, despite plans for a $24 per share cash leverage buyout of the company. The SEC approved the LBO in late-September. Shares are drifting well below that $24 level and some investors seem to be hedging their bets on concerns the buyout might not happen. 23,000 puts and 8,300 calls traded on the stock. Meanwhile, implied volatility in HRBN options is up 28 percent and elevated at 137.