Fed Keeps Market Green 10-15-2010

Cusick's Corner
It is options expiration -- chalk filled with data (no surprises this morning) and our head grounds keeper (the Fed Chief) confirmed that he is committed to keeping things green in the economy, leaving the sprinklers of cash going for the foreseeable future. This current story of higher equities, low interest rates, low inflation, higher earnings and a thriving bull, is one that I do not think that Dr. Seuss could have written better. But, I am just wondering when the three Bears are going to show up and not really like what Goldilocks has done to the place. Sarcasm aside, it is truly amazing that while on the surface this market exudes all the true signs of a bull market, one really has to scratch their head and say, is this real or are we using smoke and mirrors? Take some time to think about that but do not wait for the smoke to clear. Start looking at protection, maybe look at puts (which look to be cheap at this juncture) on stocks owned or for a portfolio use broad based index put options. Either way, some “smart” money traders are starting to add some insurance to their portfolios. Now I am not suggesting that the market is setting up for major downside, I just like to manage risk capital by buying some cheap insurance in a prudent way. See you After Hours.

Market action is mixed on options expiration Friday. Stock index futures were in positive territory before the opening bell after economic data showed Retail Sales up .6 percent in September, which was better than the .4 percent increase that economists had expected. Meanwhile, the Labor Department reported that the September CPI, a gauge of inflation at the consumer level, rose just .1 percent last month and half as much as expected. A third piece of data released early Friday showed the NY Empire State Index of manufacturing activity up to 15.73 in October and much stronger-than-expected. Economists were looking for a reading of 5.75. Yet, while stocks held steady at the open, a modest round of selling pressure surfaced in early trading after the University of Michigan reported that its index of consumer sentiment fell to 67.9 in October, from 68.2 and below economist's estimates of 68.5. Notable weakness in the financials is also weighing down the Dow Jones Industrial Average. BofA (BAC) is down 4.3 percent and JP Morgan (JPM) lost 3.3 percent. GE is the Dow's biggest loser, falling 5.2 percent and the industrial average is off 67 points. However, the tech-heavy NASDAQ is up 17 after Google (GOOG) shares rallied 11 percent around positive earnings. The CBOE Volatility Index (.VIX) added .60 to 20.48. Options trading remains active due to the expiration, with about 6.3 million calls and 4.9 million puts traded by 12:00 ET.

Bullish
Seagate (STX) calls are seeing heavy trading following reports late-Thursday that the storage device maker in talks about a going private. Shares surged and are trading up $2.57 to $15.26 midday Friday. Options volume is running 7.5X the recent average daily. 146,000 calls and 41,000 puts traded in the ticker so far. November 16 calls are the most actives. 20,600 contracts traded, as some players initiate positions on hopes that some sort of deal news will push shares beyond $16 by the November expiration, which is five weeks from today.

Gap Stores (GPS) calls are active. Shares are up 34 cents to $19.40 after the retailer held a meeting with Wall Street analysts yesterday. Meanwhile, options volume is running 5X the average, with 27,000 calls and 1,980 puts traded. January 20 calls are the most actives and have traded 10,300X. November 21, 22, 23, and 24 calls are busy as well. It's not 100 percent clear what's driving the heavy call volume and relative strength in the stock. Maybe something positive was set at the analyst meeting Thursday?

Bearish
Wells Fargo (WFC) puts are active amid relative weakness in the banks. The SPDR KBE Bank ETF (KBE) is off 45 cents to $22.59 per share midday. Meanwhile, Wells Fargo (WFC) shares lost 68 cents to $24.04 and 125,000 puts have already traded in the bank, which is 9X the normal. November 24 puts are seeing the most action. 18,240 traded. October 24, November 21 and April 15 puts are seeing busy trading as well. The heightened activity comes ahead of the bank's earnings next week (on October 20, before market).

Alcoa (AA) is off 9 cents to $13.04 and a noteworthy morning trade is a buyer of 23,000 November 13 puts at 55 cents per contract. 32,750 contracts have now traded. Since open interest is 16,625, it looks like Friday's November 13 put buyers were opening positions and bracing for possible losses in AA shares in the weeks ahead. 55,000 puts and 24,000 calls traded on the aluminum maker through midday.

Unusual Volume Movers
BofA (BAC) options volume is running 2.5X the usual, with 838,000 contracts traded and call volume accounting for 51 percent of the activity, according to data from website WhatsTrading.com.

JP Morgan (JPM) options activity is running 2.5X the usual, with 244,000 contracts traded and call volume representing 51 percent of the volume.

Yahoo (YHOO) options volume is 2.5X the typical levels, with 165,000 contracts traded and call volume accounting for 69 percent of the activity.

Increasing volume is also being seen in Genzyme (GENZ), Suntrust (STI), and Powershares Bullish Dollar Fund (UUP).

Implied Volatility Movers
JP Morgan (JPM) implied volatility is moving higher amid heavy trading in the options market Friday. Shares lost 3.5 percent to $37.36 and options volume is 2.5X the average daily. 130,000 calls and 125,000 puts traded on the banking giant. Implied volatility jumped about 10 percent to 10 percent to 33, compared to a 52-week high and low of 56 and 24.