Cusick's Corner

The pressure continues after a disappointing forecast from AA last night in spite of a beat on the earnings side. I have been monitoring the action in the Bonds, TLT, to see if the decoupling was continuing (where equities and bonds are moving both to the downside). But we see today that the Bonds are rallying which could be a red flag at this stage for equities. The energy markets, XLE, are trading like a coiled spring that is getting further compressed. I am watching this sector closely, especially after oil heavyweight CVX warned in front of Q3 results that are out in early November. This is setting up to be a potentially dicey earnings cycle, which raises the opportunity for some decent volatility trading. If you are looking for potential ideas, hit the Idea HubTM for Big Movers and Earnings plays. See you After Hours.

Market Recap

Stock market averages are lower for a third time this week. Alcoa (AA) is down 4.3 percent and the Dow's biggest loser after the aluminum-maker posted better-than-expected EPS and revenue numbers after the closing bell yesterday, but the results represented a decline from year ago levels and investors seemed unimpressed with the company's forecast for future aluminum demand. The economic calendar remains light, but the Fed's Beige Book, which offers a qualitative assessment of economic conditions, is due out this afternoon. The only other economic data today showed Wholesale Inventories up .5 percent in August and mostly in-line with expectations. Market averages are mostly lower across the Eurozone and the euro is flat at 1.2885 on the buck, as investors await further news from EU officials about the steps needed to bail out troubled countries and help stem the debt crisis. A tightening US Presidential race is perhaps adding to anxiety on Wall Street as well. After losing 110 points yesterday, the Dow Jones Industrial Average is down another 74 points to 13,400. The NASDAQ dropped 8. CBOE Volatility Index (.VIX) is up .11 to 16.48. Overall options volumes are light, with 2.6 million calls and 2.45 million puts traded across the exchanges through 11:30am ET.

This Morning's Bullish Trading

Walmart (WMT) is at record highs and helping to add some stability to the Dow Jones Industrial Average through midday trading Wednesday. The stock rallied $2.32 to $76.46 on heavy volume 7.2 million shares after the company's CEO mentioned at an annual investor meeting that Walmart will seek to increase shareholder value through steps like dividends and share buybacks. Trading in the options on the world's largest retailer is busy today as well. 30,000 calls and 23,000 puts traded on the stock so far. The flow seems to reflect mixed sentiment, as out-of-the-money October 75 puts and December 77.5 calls are the most actives in WMT today. November 75 puts, October 75 calls and October 77.5 calls are the next most actives.

Express Inc (EXPR) is off 22 cents to $11.28 and falling to new 52-week lows today on increasing volume of 1.7 million shares. The stock is now down 25 percent since the clothing retailer lowered guidance last-Tuesday. Options order flow is interesting, as volume is running 7X the daily average. 3,940 calls and 165 puts so far. The flow is concentrated in April 15 calls, which are 33 percent out-of-the-money. Some investors are possibly buying the contract as a way to play EXPR for a rebound. That is, rather than buying shares outright today, they are locking in the right to buy (or call) the stock for $15 through the April 2013 expiration. A premium is paid to enter the contract. One call option gives the option holder the right (not the obligation) to buy 100 shares of the stock. The premium is at risk if shares hold below the strike price of the call and the position is left open through the expiration. The position can be exited or closed at any time prior to the expiration through an offsetting transaction.

This Morning's Bearish Trading

Deep out-of-the-money puts on MBIA (MBI) are today's most actively traded options contract so far. Shares of the surety and title insurance company are down 26 cents to $10.29 and 55,000 January 14 $5 puts have traded on the stock. The activity includes a buyer of 30,000 contracts for 60 cents per contract on PHLX, according to a source on the exchange floor. The $5 put on MBI is currently 51.4 percent out-of-the-money. A shareholder with a large position in the stock might have initiated the put purchase to protect or hedge a stock position from a dramatic move lower next year.

Options volume on Ericsson (ERIC), the Swedish telecomm, is running 13X the daily average. The stock is down 11 cents to $8.63 and has now dropped roughly 10 percent in the past few weeks. About 11,000 puts and 2,870 calls traded on the stock today. November 8 puts are the most actives. 9,375 contracts traded, including a buyer of 5,500 contracts for 25 cents each. Open interest is only 69 and so today's flow appears to be opening put buying in ERIC. Earnings are due out October 26 and an investor might be buying puts against stock to help hedge the risk of a bad report.

Volume Signals

MBIA (MBI) options volume is running 11.5X the (22-day) average, with 59,000 contracts traded and put volume accounting for 99 percent of the volume.

Yum Brands (YUM) options volume is 7.5X, the average daily, with 55,000 contracts traded and put volume representing for 52 percent of the activity.

FedEx (FDX) options volume is running 4X the average daily, with 54,000 contracts traded and call volume accounting for 65 percent of the activity.

Increasing options activity is also being seen in Walmart (WMT), Costco (COST), and Ericsson (ERIC).

Implied Volatility Mover

Implied volatility in Yum Brands (YUM) is down sharply after the stock rallied on earnings news Wednesday. The stock is up $5.59 to $71.30 on heavy volume of 13 million shares. Meanwhile, 27,000 calls and 30,000 puts traded on the stock. October 70 puts are the most actives. 9,740 traded. October 70 and 72.5 calls are busy as well. Implied volatility in the options on YUM was up 6 percent to 30 amid increasing put activity ahead of the news yesterday. Today, however, the post-earnings implied volatility crush has sent IV in options on the stock down 27 percent to 21.5.

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