Cusick’s Corner: Respect the Trend

The market was able to close the day in the green but did not move much into the After Hours. I did not like that the Small Caps, RUT, lagged all day. I will keep an eye on these higher beta stocks and if pressure hits this market segment then I’ll become suspect of additional upside with conviction in the short-term. Checking out at earnings names, Netflix (NFLX) jumps out today. Looking at the stock’s closing options prices, the estimated move is ~$19.75. Last quarter the stock beat earnings and popped $40, so it will be very interesting to see if lighting strikes twice. I also want to keep an eye on implied volatility; April weekly options are trading at ~180 IV, and after earnings are announced, check to see how much it is crushed after the release.

Market averages are holding gains heading into the final half hour of trading Monday. It’s the busiest week for first quarter earnings reports and there hasn’t been much other news to guide the action so for Monday. Trading was steady early after members of G-20 voiced approval over the weekend for Japan’s recently announced quantitative easing program. Japan’s Nikkei was up nearly 2 percent overnight. European markets were mostly higher as well after Italy elected its next president. Crude oil jumped $1.09 to $89.36 and gold added $29 to $1424.50. The only domestic economic stat of the day showed Existing Home Sales falling to a 4.92 million annual rate for March, from 4.95 million and below expectations of 5.01 million. Stock market averages dipped on the data, but there hasn’t been much market volatility heading into the afternoon session.

Las Vegas (LVS) adds 37 cents to $53.43 and it looks like 10,000 May 55 calls are sold on the casino-operator for $1.40, 10,000 September 60 calls bought for $2.01 and 10,000 September 70 calls sold at 55 cents. Looking at trade history and open interest, it appears that the activity in May 55 calls today covers a position opened on March 26 when the same contract was being bought for $2.85 per contract. The stock is down 5.5 percent since that time and, while the May 55s are apparently being offset for a loss, a new position is being opened in the September 60 – 70 call spread on LVS for $1.46. If so, the position adjustment seems to be expressing confidence that LVS will recover recent losses in the months ahead.

Bullish trading was also seen in Hologic (HOLX), Dupont (DD), and Skyworks Solutions (SWKS).

Mondelez (MDLZ) notched record highs early, but is now down 9 cents to $31.60 amid a flurry of put options activity on the Deerfield, IL snack foods company. 47,000 puts and 5,400 calls traded on the stock so far. May 27 puts, which are 14.6 percent out-of-the-money and expiring in 25 days, are the most active in MDLZ. 16,745 contracts traded against 24.231 in open interest. May 28 and 29 puts are also seeing interest and 30-day implied volatility in options on Mondelez is up 18.5 percent to 30. It’s not clear what is motivating the high volume today. The stock was up more than 5 percent Friday on news Nelson Peltz’s Trian Fund Management has taken a large stake in the company.

Bearish trading was also seen in Kimberly Clark (KMB), Hasbro (HAS), and Mens Warehouse (MW).

Index Trading
Implied volatility [IV] is broadly lower across the options market Monday. CBOE Volatility Index (VIX), which tracks the IV priced into a strip of S&P 500 Index (SPX) options, is down .71 to 14.26 after the S&P erased early losses and is now up 8.88 points to 1,564.13. NASDAQ Volatility Index (.VXN) is down 1.28 to 15.89 and IV on the Dow, as measured by .VXD, is off .47 to 13.12. Meanwhile, US Oil Fund (USO) is up 43 cents to $31.82 and implied volatility in the options on the ETF (.OVX) dropped 2.49 to 25.08. Lastly, .GVZ, which tracks IV of options on the SPDR Gold ETF (GLD), is down 1.22 to 23.15.

ETF Action
SPDR Technology Fund (XLK) is up 29 cents to $29.64 and options volume on the ETF is running 2.5X the daily average. Approximately 32,000 calls and 2,300 puts so far. The flow is heavily concentrated in May 30 calls on XLK. 26,650 contracts traded, including a 12,584-contract block for 23 cents per contract when the market was 22 to 23 cents. XLK is a fund that holds all of the technology-related names from the S&P 500 and a number of important companies from the sector are due to report this week, including Texas Instruments (TXN) today and Apple Computer (AAPL) tomorrow afternoon.