Cusick's Corner

The market was tested early but has rebounded quite nicely into the Midday and start of expiration week. These are critical levels, 1420 on the S&Ps, which needs to be supported so as not to cause any mid-term damage to the uptrend. The Financials, XLF, were under stress early today but have come off their worst levels and this is in spite of in line earnings from heavyweights JPM and WFC (see commentary below). One impressive move today has been the Healthcare sector, XLV, which has been one of the best performing sectors and should be watched closely especially with the second debate on tap for tomorrow night. See you After Hours.

Market Recap

Stock market averages are holding modest gains with help from Retail Sales numbers heading into midday trading Monday. The report, released one hour before the opening bell on Wall Street, showed sales increasing 1.1 percent last month, which was better than the .6 percent that was expected. On the other hand, the NY Empire State Index for October dropped to -6.2. Economists were expecting the gauge of regional manufacturing activity to print at -2.8. A third piece of data on Business Inventories was up .6 percent in August and mostly in-line with expectations. Stock index futures ticked higher on the Retail Sales report, but trading quickly turned mixed when the stock exchanges opened for business Monday. However, market averages have strengthened once again heading into midday. Modest gains across Eurozone equity markets might be helping to add some stability. France's CAC 40 Index is leading the way with a 1 percent gain. The euro is flat, however, at 1.295. Meanwhile, crude oil lost $1.31 to $90.55 and gold gave up another $24 to $1735.7. On Wall Street, the Dow Jones Industrial Average is now up 58 points and the NASDAQ gained 10.5. CBOE Volatility Index (.VIX) is off .57 to 15.57. Trading in the options market is bit light today, but will probably pick up later this week due to the options expiration. About 2.8 million calls and 2.6 million puts traded across the exchanges through 11:30am ET.

This Morning's Bullish Trading

Clearwire (CLWR) continues to see heavy trading on reports Softbank is set to make a $20.1 billion investment in Sprint Nextel (S). Clearwire is an important strategic partner and 49 percent owned by Sprint. The company helps build the network used by Sprint to offer next generation cell phone service. The Softbank investment is seen as benefiting Clearwire because it could allow the company to build out Sprint's network. CLWR is up 22 cents to $2.54 on the news on very heavy volume of 105 million shares. Meanwhile, 57,000 calls and 19,000 puts traded on the stock, which is 8X the daily average. December 2.5 and 3 calls are the most actives in CLWR today.

The Traveler's Group (TRV) is up .9 percent to $69.34 and one of 23 Dow stocks holding gains through midday trading Monday. On the options front, volume in TRV is running 7.5X the daily average. About 4,000 calls and 170 puts traded on the insurance company so far. The flow is concentrated in the October 70 calls, which are now 66 cents out-of-the-money and expiring at the end of this week. 3,000 traded for an average of 42.5 cents per contract when the market was 25 to 45 cents. Open interest is 1,772 and so today's trading activity appears to be opening positions. If so, it comes ahead of an October 18 earnings report, which is the Thursday before expiration Friday.

This Morning's Bearish Trading

Wells Fargo (WFC), which released earnings and lost 2.6 percent Friday, is down another 55 cents to $33.70 today. In options action, a noteworthy spread trades on the bank after an investor bought 17,340 October 35 puts on WFC for $1.20 and sold 17,340 November 35 puts at $1.68. The calendar spread, for a 48-cent credit, is probably a roll. That is, the investor had previously sold the October 35 puts and the contract is now in-the-money ahead of the expiration later in the week. In order to avoid assignment on the contract (and having shares put to them), they are exiting the position now. At the same time, they are selling-to-open a new position in the November 35 puts. If the end result is a short naked put, then it is not a bearish spread. Instead, the investor is probably writing the November 35 puts on hopes the stock might move higher and recapture $35 through the November expiration. If the stock does not rise above 35, the Nov 35 put writer will again face the possibility of assignment at the expiration and, if assigned on the contract, will be obligated to buy (have put) the stock (100 shares per put option) to them at the expiration. Keep in mind that an option holder (of an American-style equity options contract) can exercise their option at any time prior to the expiration and so, to the put writer, there is also the chance of being assigned at any time before the contract expires – especially as the time value of the contract approaches zero. The only sure way to avoid assignment on a short option position before it expires is to close it through an offsetting transaction.

SPDR Regional Banking Fund (KRE) is up 14 cents to $28.3 after a 2.7 percent drop Friday. Financials were broadly lower Friday following post-earnings losses in JP Morgan and Wells Fargo. In options action, 5,000 January 28 puts traded on KRE today for $1.23 per contract today on the International Securities Exchange. Data from ISE is indicating an opening buyer. 10,000 of the same contract also traded for $1.23 Friday and today's open interest numbers indicate new positions were opened. If so, an investor with a portfolio of banking names might have initiated the put purchases over the past two days to help hedge the risk of additional weakness in the sector through early-2013.

Volume Signals

Clearwire (CLWR) options volume is running 6.5X the (22-day) average, with 64,000 contracts traded and call volume accounting for 73 percent of the volume.

American Agency Capital (AGNC) options volume is 3.5X, the average daily, with 49,000 contracts traded and call volume representing for 65 percent of the activity.

Annaly Capital (NLY) options volume is running 2.5X the average daily, with 28,000 contracts traded and put volume accounting for 73 percent of the activity.

Increasing options activity is also being seen in Toll Brothers (TOL), Navistar (NAV), and Texas Instruments (TXN).

Implied Volatility Mover

Implied volatility in the options on some of the mortgage Real Estate Investment Trusts [REITs] is higher, as some of the names in the sector see relative weakness today. For example, American Capital Agency (AGNC) dropped 87 cents to $31.72, options volume is running 4X the daily average, with 53K options traded and implied volatility jumped 47 percent to 30. Annaly Capital (NLY) lost 45 cents to $15.59, options volume is 3X the daily average with 30K options traded and implied volatility is up 31.5 percent to 22. Two Harbors Investments (TWO) is off 19 cents to $11.47, options volume is 7.5X the daily average, 4700 options traded, and implied volatility is up 48 percent to 30.

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