Wait-and-See Action 09-21-2011 Posted

Cusick’s Corner

The FOMC’s statement and action waits in the balance and the market in all asset classes has been tight and choppy. If the Fed announces a plan that is greater than the "Twist" program, you will see equities move but the Dollar, UUP, could get whacked and a weak buck is probably not the ambition of the Fed. If the Fed does not, like they did after the Jackson Hole meeting, roll out some sort of stimulus then the downside is going to be in play. Volatility either way is going to be present post and pre Fed.

Stocks are mixed in wait-and-see action ahead of an announcement from the Federal Reserve Open Market Committee [FOMC]. The Federal Reserve concludes a two-day meeting Wednesday afternoon and market participants are waiting to hear the details of the Fed’s future plans to help the sputtering economy. It is widely expected that the Fed will announce a move dubbed "Operation Twist," which is a plan to keep mortgage and other important rates low by favoring longer-term debt purchases in the Fed’s portfolio. Elsewhere on the economic front, data released Wednesday morning showed sales of existing homes improving to a 5.03 million annual rate in August, which was up from 4.67 million and also better than the 4.7 million that economists had expected. Meanwhile, Hewlett Packard (HPQ) is up 8 percent and easily the best gainer in the Dow Jones Industrial Average on reports the company’s Board is considering ousting the current CEO (see today’s Implied Volatility Mover). Oracle (ORCL) and Adobe (ADBE) are also helping the tech sector on the heels of better than expected earnings. Consequently, the Dow Jones Industrial Average is down 60 points, but the tech-heavy NASDAQ added 5.5. CBOE Volatility Index (.VIX) is up 1.95 points to 34.81. Overall volume is light again today, with 4.1 million calls and 4.5 million puts traded across the exchanges through 12:30pm ET.

Bullish Flow

Range Resources (RRC) rallied to a 52-week high of $77.24 this morning on takeover speculation, but is well off session highs after Dow Jones reported that Shell has not formally approached the company about a possible deal. Shares of the Oklahoma City, OK oil and gas company are now $5.36 to $70.27 and down 9 percent from its best levels of the day. Meanwhile, options volume in Range Resources is running 8X the daily average. About 25,000 calls and 7,000 puts traded in the name so far. Speculators are active in the October 80 calls, which are now almost $10 out-of-the-money and expire in 30 days. 6,666 have changed hands. October 70, 75 and 85 calls on RRC are seeing brisk trading as well.

Pharmacyclics (PCYC), a Sunnyvale, CA biotech, is trading up 45 cents to $11.95 and 10,000 puts traded on the stock so far today. By way of comparison, call activity has amounted to 110 contracts and typical options volume in PCYC through midday is about 1,100 contracts. The top trade of the day surfaced in morning action when one investor sold 6,000 October 12 puts on PCYC at 75 cents per contract. 7,700 now traded against 77 contracts of open interest. Some investors might be selling these puts on the view that PCYC will move up more than a nickel to $12 or better through the October expiration. If so, the puts expire worthless and the premium is kept. If not, and the put position is held through the expiration, they would be on the hook to buy the stock for $12 per share. Since 75 cents is collected, the breakeven at expiration is at $11.25, which represents a 5.9 percent decline over the next 30 days.

Bearish Flow

Alpha Natural Resources (ANR) is falling to new 52-week lows today after the company lowered its outlook for coal shipments and said it will "refine" 2012 earnings estimates when the coal producer reports third quarter results. Shares are now down $3.31 to $23.61 and options volume in ANR is running 2.5X the daily average, with 15,000 calls and 20,000 puts traded in the name so far. The top trade is a spread, in which the strategist sold 1,800 October 23 puts on the stock at $1.30 and bought 2,250 Jan13 $20 puts at $4.74. The action looks opening and the spread trader might be looking for ANR to hold above $23 (2.6%) through the October expiration (30 days), but to make a move below $20 (15.3%) through January 2013.

General Mills (GIS) shares rallied $1.85 to $39.34 after the company posted better-than-expected first quarter earnings and also reaffirmed its outlook for the full year. Shares are up and options volume in GIS is running 5X the daily average, with 18,000 calls and 1,900 puts traded in the name so far. The top trade surfaced early when one player sold 13,000 April 42 calls on GIS at 88 cents per contract. The position looks opening. It’s not necessarily a bearish play, but a bet that shares will hold below $42 (6.8%) through the April 2012 options expiration. A shareholder might have initiated the trade against stock as part of a covered call or buy-write strategy.

Unusual Volume

Hewlett Packard (HPQ) options volume is running 3X the (22-day) average, with 189,000 contracts traded and call activity accounting for 63 percent of the volume.

Freeport McMoran (FCX) options volume is 2.5X the average daily, with 175,000 contracts traded and put volume representing 58 percent of the activity.

Oracle (ORCL) options volume is running 2.5X the average daily, with 170,000 contracts traded and call volume representing 68 percent of the total volume.

Increasing options activity is also being seen in Starbuck’s (SBUX), Walter Energy (WLT), and Manitowac (MTW).

Implied Volatility Mover

Hewlett Packard (HPQ) implied volatility is moving higher amid heavy trading in the options on the computer maker. Shares are up $2.37 to $24.84 on reports the company’s Board is mulling the ouster of CEO Leo Apotheker. Shares rallied around the news and options volume in HPQ is 120,000 calls and 69,000 puts. Typical volume through midday is about 37,000 contracts, according to Trade Alert data. Oct 23 puts and 25 calls are the most actives. Implied volatility in the options on the stock jumped 23 percent to 23.