Cusick's Corner

With all the talk about earnings and how to play this cycle, I thought that I would look at a specific sector and how one could drill down to an idea. Let's look at metals and specifically a metal that is considered both a precious and industrial metal -- Silver, SLV. SLV has been on a downtrend and the inverse correlation continues to be in play. So when the buck goes up, Silver goes down. But there is notable strength in the chip sector, SMH, which is a consumer of Silver so this may be muting recent dollar strength. Plus, the largest component of the SMH index is Intel (INTC) which is over 19% of this index, and if INTC posts good earnings results and a good forecast on 1/19, this could be a nice catalyst for both the stock and potentially for the commodity. This is just a window into the process of potential idea generation. See you Midday.

Market Recap

Stock market averages remained range-bound ahead of the earnings-reporting season Monday. Alcoa (AA), which finished up 2.9 percent and was the best gainer in the Dow Jones Industrial Average today, unofficially kicked off the reporting period with a report after the closing bell Monday. However, the floodgate on fourth quarter earnings reports doesn't really open until next week. The economic calendar is light as well and included just one stat on Consumer Credit today, which was up to $20.4 billion in November and almost 3X more than expected. The market showed little reaction to the data. Instead, the Dow Jones Industrial Average traded in a narrow 75-point range and finished up 33 points on the session. The tech-heavy NASDAQ gained 2.3 points.

Today's Bullish Trading

Options on Netflix (NFLX) were heavily traded Monday. Shares rallied $11.89 to $98.18 and options volume on the stock hit 4X the daily average levels after the company unveiled plans to expand its services to the UK and Ireland. Shares have now rallied 40 percent in 2012 and the stock is hands down the best performer in the S&P 500. Meanwhile, options volume in NFLX Monday was an impressive 255,000 contracts. 152,000 calls and 103,000 puts traded on the stock. Weekly $100 calls that expire on 1/13 were the most actives. 12,500 changed hands, as some optimistic traders were likely taking positions on hopes that NFLX might recapture the $100 level by the end of the week. The stock has not traded north of $100 since it tumbled 34.9 percent on 10/25 after earnings were last reported. The company will report again on January 25.

Bullish trading was also seen in Harman International (HAR), Avalon Rare Metals (AVL), and STEC.

Today's Bearish Trading

Perfect World (PWRD) plummeted $3.19 to $8.81 after negative article apparently surfaced about the company over the weekend in China (unconfirmed). For whatever reason, shares of the Chinese video game maker sank to new 52-week lows and settled the day down $3.19 to $8.81. Options surged to more than 70X the daily average. 9,150 puts and 6,830 calls traded on the stock. Typical volume is only 220 contracts. January 10 calls, which are now $1.19 out-of-the-money and expiring in 11 days, were the most actives. 4,700 traded. Jan 10 and 11 puts were heavily traded as well. Meanwhile, implied volatility in the options was up 106 percent and is now elevated at 103, as players in the options market jockeyed for position in anticipation of the next potential move in Perfect World shares.

Bearish trading was also seen in Medicines Company (MDCO), Safeway (SWY), and Watson Pharmaceuticals (WPI).

Index Recap

Mini-NASDAQ 100 Index (.MNX) is seeing more options volume than usual. The index, which is designed to equal 1/10th of the NASDAQ 100 Index (.NDX) slipped .21 points to 235.4 after NDX gave up 2.10 to 2,354 late-Monday. Meanwhile, in MNX options action, roughly 18,000 calls and 170 puts traded on the index, which is about 7X the daily average for the product. The top trade was a January 242.5 – 247.5 call spread at 24 cents, 2370X. That is, 2370 January 242.5 calls traded at 31 cents while 2370 Jan 247.5 calls were bought for 7 cents. The spread traded almost 4000X across multiple exchanges and data from one exchange indicate a seller was initiating the trade (selling 242.5 calls and buying 247.5 calls). If so, they might expect MNX to hold below 242.5 (+3 percent) through the end of next week and he or she is selling the Jan 242.5 calls on the index. They're also hedging that position by purchasing January 247.5 calls on MNX.

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