Midday Update for February 7, 2011

S&P 500 Index (.SPX) 1,321.13 +10.26
CBOE Volatility Index (.VIX) 16.13 +0.20
DJIA 12,172.83 +80.68
NASDAQ 2,791.51 +22.21

Stock market averages are holding solid gains following another round of deal-making Monday. With no economic data on the docket until a report on Consumer Credit this afternoon, the focus was on stock news. AOL is in focus after it made a bid for web news site Huffington Post. Pride International (PDE) is running higher after Ensco (ESV) made a bid for the oil driller. Danaher (DHR) is buying medical equipment maker Beckman Coulter (BEC). The day's earnings news is light. Loewe's (L) and Lorillard (LO) are up on better-than-expected results, Humana (HUM) is seeing post earnings weakness. The Dow Jones Industrial Average is up 82 points and the NASDAQ has added 26. The CBOE Volatility Index (.VIX) edged up .07 to 17. Trading in the options market is active this morning, with 5.5 million calls and 4.7 puts traded through 12:30pm ET.

Bullish Flow

Cisco Systems (CSCO) sees brisk trading ahead of earnings. Shares are up 17 cents to $22.33 and in the midst of a six-day winning streak. 156,000 calls and 44,000 puts have traded in the networking company through midday. March 23 calls have traded 38,370X and are today's most actively traded stock options contract. 36,300 February 22 calls have also changed hands. The heavy trading in Cisco February and March call options comes ahead of earnings, due Wednesday after the closing bell.

A noteworthy spread trades in the Technology Select Sector Fund (XLK). This exchange-traded fund holds all of the information technology names from the S&P 500 and is trading up 23 cents to $26.92. In options action, one investor sells a block of 55,000 February 27 calls at 18 cents per contract and buys 22,000 March 27 calls at 44 cents each. The action looks like a roll, or closing out a bullish position in the February calls, which expire at the end of next week, to open a new position in March 27 calls.

Bearish Flow

An interesting three-way spread trades in Seagate Technology (STX) today. Shares of the storage device maker are trading up 6 cents to $14.40 and one strategist apparently sold March 14 calls at 80 cents, bought March 12 puts at a nickel, and bought 10,000 February 13 calls, 10000X. In this spread, the investor might be adjusting a position ahead of the expiration, or buying-to-close February 13 calls to open a new bearish position in the March 12 – 14 risk-reversal. A shareholder might have initiated the trade to protect or "collar" a position in Seagate shares.

Dean Foods (DF) puts are actively traded. Shares are up 6 cents to $10.42 and options volume is 2.5X the recent average daily. 13,000 puts and 3,205 calls traded in the grocery chain so far today. February 10 puts are the most actives. 7,260 traded. Another 3,650 March 9 puts changed hands. The increased activity might be a play on earnings, due the morning of February 16.

Implied Volatility Movers

China MediaExpress (CCME) shares are down and options are heavily traded again Monday. Shares lost 33.4 percent last week after a research firm alleged the company is involved in a "massive pump and dump scheme". CCME denies the allegations. Still, shares fell last week and are down another 75 cents to $13.14 today. Options volume includes 23,000 calls and 23,000 puts. Meanwhile, implied volatility remains elevated at 135, but down from about 145 late Friday.


Unusual Volume

Financial Select Sector Fund (XLF) options volume is running 2.5X the average daily, with 687,000 contracts traded and put volume accounting for 92 percent of the volume, according to data from WhatsTrading.com.

Popular (BPOP) options volume is 10X the average daily, with 42,000 contracts traded and put volume representing for 97 percent of the activity.

Baxter (BAX) options volume is running 4X the average daily, with 31,000 contracts traded and call volume accounting for 95 percent of the activity.

Increasing options activity is also being seen in Gannett (GCI), Nordstrom (JWN), and American Electric Power (AEP).

Posted in Commentary, Earnings, Futures, Options, Stocks, Watchlist