Malus domestica Produces 07-19-2011

Cusick's Corner
AAPL: in the infamous words of Harry Caray, "Holy Cow!" The large cap Tech company blew earnings away and still led with conservative guidance, no surprise, into Q3. While the NASDAQ futures popped, the S&Ps have muted reaction to the After Hours news, further stressing that the Financials will need to get a bigger lift if this index is going to challenge the upside. The market will be watching for further headlines on the debt ceiling crisis and will pay attention to Crude, CLU11 (made a nice run today +$2), and if there is a build in Inventories, questions could arise about the consumer again. I will watch overnight action to see if the market holds support on the S&P September futures at 1315. See you Midday.

Stocks rallied with help from earnings and housing data Tuesday. IBM gained 5.7 percent and was the biggest winner in the Dow Jones Industrial Average after the computer maker posted earnings that beat Street estimates. Coca Cola (KO) was also among the Dow's winners after the company's latest profit report exceeded expectations. BofA (BAC) and Johnson & Johnson (JNJ) were among only three losers within the Dow Jones Industrial Average. Both companies reported earnings before the opening bell Tuesday. Beyond that, twenty-seven Dow stocks finished higher. Economic news helped. A report released before the opening bell on Wall Street showed Housing Starts improving to an annual rate of 629,000 in June, which was up from 549,000 the month before and considerably better than the 570,000 that was expected. Gains in Eurozone equity markets and strength in some of the energy-related names on higher crude oil also helped to fuel Tuesday's rally. Crude traded up $1.81 to $98.06 per barrel. Meanwhile, the Dow moved higher in morning action and was up 116 points at midday. The rally continued into the closing bell and the industrial average added 202 points on the session. The tech-heavy NASDAQ posted a 61.4-point gain.

Bullish
Microsoft (MSFT) saw impressive options volume Tuesday. 241,000 calls and 156,000 puts traded on the software maker. The largest options trades in Microsoft were in the long-dated 2013 contracts. In this strategy, the investor bought 26,100 January 30 calls at $1.83 and sold 26,100 January 22.5 puts at $1.72. In other words, they initiated a Jan13 22.5 - 30 bullish risk reversal for an 11-cent debit. Shares finished the day up 95 cents to $27.54 and this position will pay off well if Microsoft shares make a significant move higher beyond $30 per share through January 2013. By writing the $22.5 puts, the strategist is also a willing buyer of the stock at that price. Microsoft August 27 calls, September 28 calls and January 30 calls were heavily traded as well. October 25 puts were the most actives. 30,354 contracts changed hands. Next, focus soon shifts to earnings. Microsoft is due to release its results Thursday afternoon.

Bullish trading was also seen in Chevron (CVX), Masco (MAS), and EMC.

Bearish
DR Horton (DHI) shares rallied 64 cents to $11.93 after data released early Tuesday showed a surprise jump in June housing starts. In the process, shares just about erased a 6-day 5.8 percent loss suffered prior to today. Meanwhile, options flow in DHI was interesting, as one investor sold 18,000 August 12 call options on the homebuilder at 37 cents per contract. At the end of the day, 19,873 traded against 13,041 contracts in open interest. This massive call write looks like a new position and is not necessarily a bearish play, but appears to be a bet that shares will hold at $12 or less through the August expiration. A shareholder might have sold the calls against a stock position. Next up for the homebuilders: Existing home sales data Wednesday morning.

Bearish flow also surfaced in Eastman Kodak (EK), Whirlpool (WHR), and Macy's (M).

Index Trading
CBOE Volatility Index (.VIX) lost 1.74 points to 19.21 and trading was brisk in VIX options today due to the expiration. VIX July options expire tomorrow and today was the last day to trade. 524,000 calls and 154,000 puts traded in the volatility index today. August 27.5 calls were the most actives. 74,040 changed hands. September 27.5 calls and August 30 call options were heavily traded as well. Some investors were likely closing out positions in the July contract because today was the last day to trade the expiring contracts, and then opening new positions in the out-of-the-money August and September call options. That is, they're rolling positions from one month to the next. July 25 and 30 calls currently have the most open interest in VIX options, with OI of 238,023 and 189,339 contracts, respectively. In tomorrow's settlement value for the VIX is less than 25 (which seems likely since VIX is at 19.21) all of those contracts expire worthless.

ETF Action
A noteworthy spread trades in the SPDR Oil Exploration and Production ETF (XOP) today. XOP, which is an exchange-traded fund that holds shares of major oil companies like Exxon and Chevron, finished the day up $2.05 to $63.65 after crude oil rose $1.81 to $98.06 per barrel. In options action, one investor bought 20,000 September 62 puts on the XOP at $3.15 per contract and sold 20,000 September 58 puts at $1.65. In other words, the investor initiated a Sep 62 - 58 put spread for a $1.50 net debit, 20000X. This spread, if held to the expiration, offers a $2.50 payout (minus commissions) if shares fall to $58 or less through the September expiration, which represents a decline of about 9 percent.