Companies Beating Earnings Expectations Help Stocks Overcome Weakness To Close Higher Tuesday

Earnings are in full swing and companies are beating earnings expectations but missing on revenues and guidance. During this earnings cycle I’ve been watching the options volume for companies on my hit list to see if there is any activity that might raise my eyebrows. Today I saw an interesting May put spread that went up in Yahoo (YHOO) - the May 14 puts were purchased and the May 12 puts were sold. This bear put spread would be profitable if the stock between now and May Expiration (26 days) is below the Break Even point, in this case would be the long strike price (14) minus the premium paid (.72). YHOO reported after the close, beat estimates by .07 but missed on revenues (attributed to some traffic acquisition costs) and announced that they are going to lay off 5% of their work force. We will see tomorrow and in the upcoming weeks if YHOO pulls up, contrarian to the potential profit goals of the May put spread which traded today.

I also saw a large quantity of SPY puts trade over 180K times - the May 78 put - mostly on the ask side possibly indicating they bought them to open. The SPY closed at $85 so this position could be perceived more as a hedge than a speculative position which is a significant since the SPY would have to drop 9% for these puts to start to be in the money. There are a ton of earnings and economic reports so check out the OX Research Center to see what news is coming out. See you Midday.

After Hours

Stocks overcame early weakness to close broadly higher Tuesday. The day was off to a shaky start following a round of mixed earnings news, including several Dow components–Coca Cola (KO), DuPont (DD), Merck (MRK), and Caterpillar (CAT)–and after fears about the ongoing problems in the credit markets sent financials reeling the day before. A number of financial names–including Dow components BofA (BAC) and Citi (C)–had again moved into the red in pre-market action Tuesday morning. However, Citi shares found a floor in morning trading after the bank’s CEO said he expects his company to rebound.

A number of bank stocks also seemed to get a lift from Treasury Secretary Tim Geithner’s comments on Capitol Hill. Geithner told Congress midday Tuesday that many banks have more than enough capital and some could begin repaying government loans. Consequently, the Select Sector Financials (XLF), which holds all of the financial-related names from the S&P 500, hit a low of $9.41 early in the day, but rallied back to close up 73 cents to $10.60 per share. The Dow Jones Industrial Average recaptured 128 of the 289 points lost the day before. The CBOE Volatility Index (^VIX) slipped 2.10 to 37.08. Approximately 8.5 million calls and 7.3 million puts traded across the exchanges.

Bullish

Retailer Pacific Sun (PSUN) finished up 46 cents to $3.02 and options volume jumped to 19X the usual Tuesday. 4,287 calls and only 261 puts traded. June 2.5 and June 5 calls led the order flow, with more than 3,700 traded and about 70 percent hitting ask-side of the bid-ask spread. It looks like buyers were dominating the action. There was no obvious news to explain the bullishness. Earnings are expected in mid-May. Bullish trading was also seen in Halliburton (HAL), FMC Corp. (FMC), and Terex (TEX).

Bearish

Computer wholesaler Scansource (SCSC) saw bearish trading activity Tuesday. Shares moved up 59 cents to $21.93 and total options volume rose to 347X the normal levels. Most of the activity was in the June 20 puts. 5000 contracts traded, compared to open interest of only 30. The top trade of the day, 4,821 contracts for $1.45 on NYSE when the bid-ask was $1.15 to $1.50. Looks like an opening buyer and comes ahead of earnings due out on April 23. Bearish trading also surfaced in Yahoo (YHOO), Pharmaceutical Product and Development (PPDI), and MGA International (MGA).

Index Trading

The CBOE Volatility Index (^VIX) rallied 5.2 points Monday, but lost 2.06 to 37.12 Tuesday. In the options market, some investors seem to be bracing for higher levels of market volatility in the short-term and bought VIX May 55 calls. 27,500 contracts traded and 88 percent of the volume traded ask-side of the bid-ask spread. Beyond that, the S&P 500 Index (.SPX), the PHLX Swiss Franc Index (.XDS), and the Mini-NASDAQ 100 Index (.MNX) had among the most actively traded contracts. Trading was light, with 466,000 puts and 337,000 index calls traded across all the index products.

ETF Trading

The iShares South Korea Fund (EWY) saw increasing volume Tuesday. Shares gained $1.49 to $32.22 and total options volume rose to 4X the normal levels. Most of the activity was in June puts, after a strategist apparently opened a new bearish position–buying 3,850 June 27 puts and selling 2X as many June 22 puts. This 1X2 ratio spread has a bearish risk graph, as it yields its best profits if the fund settles at the June expiration at $22 per share. Outside of that, the SPDR Trust (SPY), the PowerShares QQQ (QQQQ), and the Select Sector Financials (XLF) had among the most actively-traded ETF options. Approximately 2.4 million puts and 2.1 million calls traded across all exchange traded funds.

Subscribe by RSS Subscribe by Email