European Concerns Inject Uncertainty but Equities Maintain Gains

Cusick’s Corner
Stock market averages have erased early losses and are holding modest gains heading into the final hour of trading Wednesday. The underlying tone was cautious early after European markets moved broadly lower amid uncertain political elections in Portugal. There seem to be growing concerns that a political shake-up might thwart bailout efforts for the struggling European nation. Ongoing strength in crude oil, which is now up $1.96 to $101.56 and its highest levels since May 2012, is also getting noticed. Gold gained $13 to $1256.5. On the domestic economic front, a report released today showed the economy adding 188,000 private sector jobs in June, according to ADP. Economists were looking for 150,000. However, ISM Services Index for June was just 52.2, from 53.7 and below expectations of 53.7. Nevertheless, the Dow has staged a midday turnaround and, after falling as much as 73 points, is now up 87 points. The NASDAQ has added almost 20. CBOE Volatility Index (.VIX) is off .21 to 16.23. Overall options volumes are running well below normal, with 3.3 million calls and 3.3 million puts traded across the exchanges through 12:15pm ET. Markets close early today, at 1:00pm ET.  See you Monday.

Bullish Flow
Fortinet (FTNT) adds 82 cents, or 4.7 percent, to $18.16 in relatively active trading of 2.7 million shares, but no immediate headlines to explain the relative strength in the security software company Wednesday. On the options front, trading is brisk, as 37,000 calls and 1,440 puts traded in FTNT so far. The top trades were part of a spread that printed just after the opening bell. An investor bought 10,000 August 20 calls on FTNT for 85 cents per contract and sold 10,000 August 22 calls at 40 cents, according to a source on the exchange floor. This new position, an Aug 20-22 call spread for 45 cents, appears to be a bullish trading on FTNT targeting a move to $22 or more through the August expiration, which is in 44 days.

Micron Technology (MU) drops 13 cents to $14.18 and options volume on the chipmaker is about 78,000 calls and 8400 puts. The top trades are part of a spread, in which the investor was selling 17,000 October 14 calls on MU at $1.58 and buying 17,000 October 16 calls for an average of 81.5 cents per contract, according to a source on the exchange floor. Looking at trade history, the activity appears to be rolling activity, or selling the Oct 14s to close a position opened on 6/24 when 17,000 were bought for $1.37 per contract, while opening a new position in the October 16s. If so, the adjustment seems to be expressing confidence in MU for the next few months. Shares have already rallied 123 percent year-to-date.

Bearish Flow
Linn Energy (LINE) remains under pressure. As noted in yesterday’s midday report, the stock fell Tuesday after the company disclosed an SEC inquiry and the news prompted multiple analyst downgrades of the stock. Shares are down another $4.3, or 15.6 percent, to $22.75 today and active trading in the options on the stock continues. 37,000 calls and 82,000 puts traded on the stock yesterday. 42,000 calls and 45,000 puts have traded in the name today.

Put options on the iShares Emerging Markets Fund (EEM) continue to draw a lot of interest. 465,000 contracts traded yesterday. Shares are down 17 cents to $37.76 today and another 292,000 puts have traded on the ETF. September 37 puts, July 37.5 puts and August 33 puts are the most actives and implied volatility in EEM, as measured by VXEEM Index, is up another .32 to 30.5 today. The index, which is the VIX index for the emerging markets ETF, surged 17.7 percent yesterday.

Unusual Volume
US Oil Fund (USO) options volume is running 2X the (22-day) average, with 147,000 contracts traded and call volume accounting for 52 percent of the volume.

DELL options volume is 9.5X, the average daily, with 118,000 contracts traded and call option volume representing 71 percent of the activity.

Supervalu (SVU) options volume is running 4X the average daily, with 28,000 contracts traded and call volume accounting for 100 percent of the activity.

Increasing options activity is also being seen in Apache (APA), Suncor (SU), and Santander (SAN).

Implied Volatility Mover
Implied volatility in the options on Emulex (ELX) is moving sharply higher along with the stock today. ELX is up $1.04, or 15.6 percent, to $7.70 in heavy trading of 3.8 million shares in reaction to a Bloomberg story that suggested the data storage company has hired an advisor to explore a sale. Options volume on ELX is running 36X the daily average, after about 7,000 calls and 750 puts traded on the ticker. July 8 calls are the most actives and 30-day implied volatility in the options on the stock is up 46.5 percent to 48.5.