Cusick's Corner

This was a constructive day. With the Non-Farm payrolls and Unemployment, strategically I am looking at spread strategies that take advantage of high implied volatility and conviction on direction, as well as mitigate capital risk instead of just going long or short the underlying outright. One note, I want to be clear that the market trend has been strong to the upside lately and we have decent support, 1120 on the S&Ps, but the trend is bearish and with the headlines lately that have been driving this market, you do not often have market bottoms formed with these types of catalysts. This means stay nimble. See you Midday.

Market Recap

Stock market averages rallied along with European benchmarks Thursday. UK's FTSE led the advance with a 3.7 percent rally after the ECB pledged more loans to help the battered banks across the continent. The only domestic economic stat of the day showed jobless claims up by 6,000 to 401K last week, which was in-line with expectations. Meanwhile, Target (TGT) and Nordstrom (JWN) were among the retailers rallying today on better-than-expected September sales results. The Dow Jones Industrial Average was up 109 points and the NASDAQ gained 35 through midday. From there, market action slowed a bit, but stocks remained bid ahead of key data Friday morning. Economists expect the Labor Department to report tomorrow that the US economy added 83,000 jobs and the unemployment rate was unchanged at 9.1 percent in September. The Dow finished the day up 183 points ahead of the news. The NASDAQ gained 46.3.

Today's Bullish Trading

Calls on Nuance Communications (NUAN) were heavily traded today. Shares of the Burlington, MA software developer rallied $1.77 to $21.89 and are now up 12.7 percent since Apple unveiled its new iPhone 4S product Tuesday. The new device will include dictation to support multiple languages. Nuance develops the voice-to-text technology. NUAN was up Tuesday on the product announcement and, after a dip lower Wednesday, was up again today. Options volume on the stock was 6X the daily average. 12,000 calls and 825 puts traded on NUAN Thursday. October 22 calls, which are now just 11 cents out-of-the-money and expiring in two weeks, were the most actives. 5,232 traded. Another 3,893 October 21 calls changed hands. Heavy interest in short-term October calls on Nuance seems to reflect some expectations that the rally can continue in the days ahead. Shares have already really more than 30 percent since earnings were reported on 8/9.

Bullish trading was also seen in MBIA (MBI), McDermott (MDR), and Las Vegas Sands (LVS).

Today's Bearish Trading

US Bancorp (USB) saw high put volume Thursday. Shares added 55 cents to $24 and are on a three-day 6 percent run higher. USB is now 19.4 percent above the 52-week low of $20.1 set intraday on August 23. Meanwhile, options action in the bank was noteworthy today, as 30,000 puts and 6,600 calls traded on the stock. Dec 20, Dec 23, and Oct 23 puts saw interest. The top trades were part of a ratio spread, in which the investor bought 2,500 January 24 puts on USB at $2.37 and sold 5,000 January 20 puts were sold at $1.10. 17 cents was paid for this Jan 24 – 20 (1X2) put ratio spread and today's strategist might have initiated the trade on concerns USB will revisit its 52-week lows through January 2012. The debit is lost if shares hold above $24 and the position is held through the expiration. There is additional downside risk to put ratio spreads, because only half of the lower strike puts (which are sold) are covered by the higher strike puts (which were bought).

Bearish trading was also seen in St. Jude Medical (STJ), Veeco Instruments (VECO), and Tech Data (TECD).

Index Recap

A noteworthy spread traded on the S&P 500 index (.SPX) late-Thursday. The index added 20.94 to 1,164.97 and is now up 8.4 percent from the 52-week low of 1,074.77 set intraday Tuesday. In late-day options action, one strategist was active in SPX October puts and bought the 1140 strike at $22.30 and sold the 1130 strike at $19.00. This Oct 1140 – 1130 put spread, for a $3.30 net debit, traded 33,000X. It's a hefty premium purchase and seems to be a bearish market bet. The spread buyer will reap their best profits if the index falls to 1130 through the October expiration, which represents a 3 percent market decline over the next 14 days. An institutional investor might have initiated the put spread to help hedge a stock portfolio.

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