Up 09-20-2011

Cusick's Corner
Running scared, the market is running to the upside with sideline cash now biting for fear of missing the next leg to the upside. This is the type of action that I have been discussing, the risk of this market was on the upside which means that under invested managers may panic when they see a market that is outperforming their heavy cash and fixed income positions, forcing a potential run to the upside. Volatility has come out of the market today, so this action looks to have some teeth today and I will be keeping an eye on critical levels, 1200 on the S&Ps, to see if they can hold. One note, the housing data came in mixed, with starts lower than expected and permits a lot higher, this has some of the homebuilders, XHB, on the move. See you After Hours.

Stock market averages vacillated between gains and losses Tuesday morning, but are in positive territory through midday. Trading was choppy early amid ongoing concerns about the European Debt Crisis and ahead of a Federal Reserve meeting on monetary policy. The FOMC begins its two-day meeting today and concludes with a post-meeting statement Wednesday afternoon. Disappointing Housing Starts numbers, which fell to an annual rate of 571,000 in August (vs. 590K consensus and 601K in July), weighed on early trading as well. However, solid gains across Eurozone equity markets and a rebound in the EU/USD currency pair seemed to help keep a floor under the equity market through mid-morning. From there, a modest rally attempt sent the Dow Jones Industrial Average up 116 points through midday. The tech-heavy NASDAQ is up 22.6. CBOE Volatility Index (.VIX) is down .96 to 31.77 amid slow action in the options market. 3.4 million calls and 3.1 million puts traded across the exchanges through 11:40om ET.

Bullish Flow
Apple Computer (AAPL) options are busy today. Shares are setting new record highs and were recently up $9.52 to $421.15 after the company said it would begin selling a version of the iPad2 in China. Options volume on the stock through midday includes 210,000 calls and 99,000 puts. Weekly (9/23) 420 calls are the most actives. The contract is now $1.15 in-the-money and expires at the end of the week. 13,835 contracts have changed hands, as some players might be taking positions in these very short-term contracts on hopes the rally in Apple can continue through the close of trading Friday. Weekly 415, 425, and 430 calls on Apple are seeing brisk trading as well. Weekly 415 puts are the most active put options in Apple today.

AMR is up 17 cents to $3.51 and options on the airliner are seeing heavy trading today after the International Air Transportation Association raised its 2012 profit forecast for the industry. AMR is gaining some altitude and options volume through midday is 35,000 calls and 11,000 puts. October 3 calls, which are now 51 cents in-the-money, are the most actives. 26,100 traded and, with 83 percent trading at the ask and open interest of only 678, it appears that call buyers are taking positions and looking for the run higher in AMR to continue through the October expiration, which is in 31 days.

Bearish Flow
The top options trade so far today is an 83,000-contract block of December Quarterly 103 puts on the SPDR 500 Trust (SPY). Shares are up $1.49 to $121.80 and the block was sold as part of a four-way spread. In this strategy, the investor sold 41,500 December [Qtrly] 139 calls at 55 cents, bought 41,500 115 puts, sold 83,000 103 puts, and bought 41,500 90 puts. In other words, they sold upside 139 calls to buy a 90 - 103 - 115 put butterfly spread. All of these contracts expire at the end of the fourth quarter and it is likely that an institutional investor initiated this massive spread to help hedge a stock portfolio. It traded more than once on the day and offers a max payoff if shares fall to $103, or 15.4 percent, through year-end.

Calls on Bed, Bath and Beyond (BBBY) are being sold ahead of earnings. Shares are up 21 cents to $60.07 and the focus is on October 65 calls. A 7,705 contract block traded at 77 cents when the market was 77 to 81 cents. Another 4,500 also traded at 77 cents. Total volume in the contract is now 13,785 against 1,462 in open interest. The October 65 call on BBBY is 8.2 percent out-of-the-money and it appears that some investors are selling-to-open new positions ahead of the company's earnings release, which is due out tomorrow afternoon. It's not necessarily bearish trading, but a bet that the stock won't recapture $65 through mid-October. A shareholder might have initiated the trades as part of a covered call or buy-write strategy.

Unusual Volume
Molycorp (MCP) options volume is running 2X the (22-day) average, with 52,000 contracts traded and call activity accounting for 61 percent of the volume.

AMR options volume is 4X the average daily, with 40,000 contracts traded and call volume representing 75 percent of the activity.

Celgene (CELG) options volume is running 3X the average daily, with 18,000 contracts traded and call volume representing 65 percent of the total volume.

Increasing options activity is also being seen in Goodrich (GR), El Paso (EP), and Carnival Cruise (CCL).

Implied Volatility Mover
Implied volatility in MolyCorp (MCP) is moving higher today. Shares are down $9.81 to $43.20 and came under pressure early Tuesday after JP Morgan cut its rating on the stock to neutral. The firm also slashed its price target to $66 from $107 due to concerns about the outlook for prices of rare earth materials after a big run-up in the spring. Options volume in MCP is running at more than twice the daily average. 36,000 calls and 22,000 puts traded in the name. Implied volatility in options on the stock rallied 35 percent to 85.