Cusick's Corner 01-25-2013 Midday

We are at a crossroads today in the markets. As I have been saying for the last few weeks, the institutions have been the buyers. I also have been writing that the retail community has been chomping at the bit to find a decent entry point. Fund flows have been on the uptick and the overall sentiment of the retail trader appears to have turned from mixed to slightly bullish to bullish. With the S&Ps flirting with 1500 and the market holding up well in spite of Tech heavyweight Apple (AAPL) getting clobbered yesterday, it would be hard to take a negative stance on this current trend. Plus, the Euro Currency is rallying, FXE +.63%, so not the time to try to pick tops. I will continue to stay disciplined, potentially piecing into some longs on dips. I will be keeping an eye on the Bonds, TLT, which have been holding up well and the Buck, UUP, to see if any strength returns in that market. See you After Hours.
Market averages are higher despite poor homes sales numbers Friday. New Home Sales fell to an annual rate of 369,000 in December, from 398,000 the month before and well below expectations of 369,000. Yet, stock market averages had opened higher and held the gains through the data. Procter & Gamble (PG) is up 3.3 percent and the best gainer in the Dow Jones Industrial Average in the wake of its earnings report. Microsoft (MSFT) has erased early losses and is higher after reporting earnings Thursday afternoon. Elsewhere, Japan's Nikkei rallied 2.9 percent and European markets are on solid footing following a report on German confidence. However, crude oil slipped 28 cents to $95.67 and gold lost another $13 to $1657. On Wall Street, the Dow Jones Industrial Average has added 25 points and the NASDAQ gained 7.5. CBOE Volatility Index (.VIX) is up .29 to 12.98. Overall trading in the options market is active, but off the pace seen yesterday. 2.8 million calls and 2.3 million puts traded through 10:30am ET.
Bullish Flow

Applied Materials (AMAT) is up 32 cents to $12.92 in active trading of 6.4 million shares and options on the semiconductor capital equipment-maker are busy today. 23,000 calls and 1,225 puts so far. The top trade is a 10,000-contract block of March $13 calls for 37 cents per contract and appears to be an opening buyer, as the market was 35 to 38 cents at the time and open interest is 727 contracts. 16,891 March 13 calls now traded on the stock so far. No obvious headlines on Applied Material to explain the interest today. Earnings are due out the afternoon of February 13.
Call options on Electronic Arts (EA) are also seeing interest Friday. Shares of the video game company are up 45 cents to $14.71 and total options volume is 15,000 calls and 2,055 puts. Much of the flow is concentrated in February 16 calls on the stock and includes a 4000-contract block for 16 cents per contract. An investor bought the calls, according to a source on the floor. 11,480 contracts now traded against 456 in open interest. The increased activity comes ahead of EA's earnings next week, due out on Jan 30.
Bearish Flow

Keycorp (KEY) is off 6 cents to $9.18 and options volume on the regional bank is running 20X the daily average, driven by a four-legged combo play. The investor apparently sold 37,000 Mar 7 puts on KEY at a penny per contract, bought 37,000 March 8 calls for $1.20, sold 37,000 June 9 calls at 61 cents, and bought 37,000 June 7 puts for 9 cents. The activity probably adjusts a position in a bearish risk-reversal (buying puts and selling calls) and rolls the position out from March to June. An investor with a large stake in the bank might have initiated the trade to adjust a "collar" on KEY today.
Cemex (CX), the Mexican cement company, is down 7 cents to $10.72 and options order flow is lopsided, as more than 10,000 puts and 175 calls traded on the stock. Much of the volume is due to one transaction after 10,000 Jan 10 puts traded on CX for $1.14 per contract on ISE. Data from the exchange indicates an investor bought the puts, to open. A shareholder might have initiated the trade to help hedge a stock position through the rest of 2013. The stock has more than doubled in value since mid-June.
Unusual Volume

Netflix (NFLX) options volume is running 2.5X the (22-day) average, with 161,000 contracts traded and call volume accounting for 53 percent of the volume.
P&G (PG) options volume is 3X, the average daily, with 83,000 contracts traded and put volume representing 52 percent of the activity.

Starbucks (SBUX) options volume is running 2X the average daily, with 45,000 contracts traded and call volume accounting for 70 percent of the activity.
Increasing options activity is also being seen in Aetna (AET), Verisign (VRSN), and Under Armour (UA).
Implied Volatility Mover

Implied volatility in the options on United Airlines (UAL) is up, as shares lose altitude on an analyst downgrade Friday. The stock is down is down 77 cents to $24.77 in active trading of 2.75 million shares. Meanwhile, 5,760 calls and 3,735 puts have traded on the airliner. February 26 calls, which are 5 percent out-of-the-money and expiring in three weeks, are the most actives. 2,570 contracts traded. Meanwhile, implied volatility in UAL options is moving up 13.5 percent to 36.
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