The Risk Was to the Upside

Cusick’s Corner Frdiay, 7-13 1:00pm


As I noted last night, the risk is to the upside. The market, S&P +1.47%, is up across the board with Financials, (XLF +2.31%) leading the way and the beleaguered banks now over resistance, JPM is above the 50 moving average. I am taking this as a short term positive but if the S&P can break above the 1350 and finish the day above that level, for the first time in 6 sessions bears potentially might have to reevaluate. See you After Hours.


Market Recap

Stock market averages are rallying around Chinese economic data and earnings from the banking sector. Data released Friday showed China’s economic growth slowing to an annual rate of 7.6 percent in the most recent quarter; which was not as bad as some feared, but also leaves to door for further policy action to stimulate the economy. In Europe, trading was orderly and Germany’s DAX helped lead an advance across equity markets with a 1.9 percent rally. The euro is up .2 percent to 1.223 against the dollar.

Diminishing fears about a worldwide economic slowdown and problems in Europe helped set the table for a morning advance on Wall Street. The domestic economic news showed the latest Producer Price Index up .1 percent and significantly greater than the .6 percent drop that was expected. The U of Michigan sentiment index for July fell to 72, from 73.2 in late-June and well below expectations of 73.5. But earnings news helped as well, with both Wells Fargo (WFC) and JP Morgan (JPM) trading higher on the heels of their respective results. Crude oil is up 79 cents to $86.87 per barrel and gold gained $26 to $1591 an ounce.

The Dow Jones Industrial Average opened modestly higher and built some upward momentum in morning trading. The Dow is up 182 points and near session highs at midday. The NASDAQ gained 34.4 points. CBOE Volatility Index (.VIX) is falling back towards multi-month lows and was recently down 1.49 to 16.84. Overall options volumes are running about the typical levels.


This Morning’s Bullish Trading

Options on Procter & Gamble (PG) are busy for a second day. Shares of world’s largest consumer products company rallied yesterday after the Federal Trade Commission approved an unspecified deal for activist investor William Ackman’s Pershing Square Capital to invest in PG. The stock is up another $1.72 to $65.42 on heavy volume of 17.5 million shares and helping the Dow Jones Industrial Average on reports Ackman is indeed taking a substantial stake in the company. Options on PG are busy as well. 110,000 calls and 31,000 puts so far. January 85 calls are the most actives. 23,200 traded. January 67.5 and July 65 calls are seeing high volume as well.

JP Morgan (JPM) is the best gainer in the Dow after the bank reported a $1.21 per share profit on better-than-expected revenues of $22.9 billion. In the post earnings call, CEO Jamie Dimon said he expects his bank to report record earnings in 2012. The robust profits come despite the now infamous "London Whale" trading debacle disclosed in May. The stock is up $2.06 to $36.1 in active trading of more than 53 million shares. Meanwhile, 212,000 calls and 115,000 puts traded in JPM so far. July 35 and 36 calls, which expire in one week, are the most active. More than 25,000 traded in both contracts.


This Morning’s Bearish Trading

Microsoft (MSFT) is ticking higher along with the broader market and was recently up 61 cents to $29.24 on relatively light volume of 15 million. Expected volume in MSFT at midday is about 20 million, according to Trade Alert data. Meanwhile, 55,000 calls and 73,000 puts traded on the software giant, which is double the expected activity. The top trades are part of a spread, in which on player apparently bought 10,000 October 29 puts on MSFT for $1.36 and sold 10,000 October 26 puts at 45 cents per contact. The spread, for a 91-cent debit, appears to be a short-term bearish bet on the stock, with a max payout if shares fall to $26 or less through the October expiration. A shareholder with a substantial position in MSFT shares might have initiated the trade as a short-term hedge ahead of the company’s July 19 earnings release.

SPDR Gold Trust (GLD) shares are up $1.82 to $154.41 after gold prices traded up $26 to $1591 an ounce Friday. GLD is an exchange-traded fund that represents ownership of the metal. Options on the fund are busy today. 108,000 calls and 30,000 puts so far. Early trades included a large block of 21,348 March 175 calls, which was sold at $3.95 per contract on the electronic ISE exchange. It was a closing trade, according to data from the exchange. 22,110 now traded. March 180 calls are the most actives in the gold fund. More than 30,000 traded and most of the volume (96 percent) was on the bid as well, which suggest call selling. Some investors might be closing out positions after the recent slide in GLD on diminishing hopes for a substantial rally in gold through March 2013. Shares are up today, but down about 11 percent since late-February.


Volume Signals

Procter & Gamble (PG) options volume is running 3X the (22-day) average, with 126,000 contracts traded and call volume accounting for 77 percent of the volume.

Kinross Gold (KCG) options volume is 6.5X the average daily, with 48,000 contracts traded and call volume representing for 86 percent of the activity.

Elan (ELN) options volume is running 7.5X the average daily, with 45,000 contracts traded and put volume accounting for 52 percent of the activity.

Increasing options activity is also being seen in US Airways, Coinstar, and Pitney Bowes.


Implied Volatility Mover

Implied volatility in the options on Vivus Pharmaceuticals (VVUS) is elevated ahead of next week’s FDA decision on the company’s potential blockbuster obesity drug Qnexa. The decision is expected on July 17. Shares are down 37 cents to $27.36 in cautious trading today ahead of the news. Options on the stock are actively traded. 6,340 calls and 10,000 puts so far. Meanwhile, implied volatility in the options on the stock is ticking 3 percent higher and is elevated at 160.5 percent, as players in the options market brace for this important company event.

Joe Cusick


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Joe Cusick

Joseph Cusick is currently Vice President of Wealth and Asset Management at MoneyBlock. Joseph is passionate about marrying his 20 years of market experience and the powerful tools at MoneyBlock with the goal of empowering wealth managers with the tools to better manage and grow their business. Joseph was previously the Senior…