Stocks Are Broadly Higher On Talk Of Further Stimulus And Kraft’s Cadbury Offer

Cusick’s Corner
Shorts seem to be on the defensive, especially after the G20 said that they will continue to provide Viagra, I mean stimulus (read summary below). This current rally is being scrutinized, checking if this is a short squeeze or if there is potentially more traction gaining in sectors that have been lagging this latest leg up, like Financials. The market cannot count on just a select few (i.e. AAPL) leading this charge much longer. There needs to be more broad based leadership. One last note, Gold has run fast and hard, but watch for some potential profit taking in the short-term. See you After Hours.

Stocks are broadly higher after G-20 finance ministers met over the weekend and pledged to continue economic stimulus programs. In a meeting in Scotland, the Group of 20 said economic stimulus measures would remain in place “until the recovery is assured.” The comments helped send equity markets broadly higher across Asia and Europe. In the US, there is not much other news to guide the market action Monday morning. The economic calendar is empty and there have been no earnings of broad market significance. Kraft (KFT) was in focus early after making a formal bid for UK’s Cadbury, which was dismissed by Cadbury as worse than the initial offer. Kraft is one of only two Dow stocks moving lower. 28 are higher and the industrial average is up 145 points midday. The NASDAQ added 30. Trading in the options market is running a bit more than usual, with 3.8 million calls and 3 million puts traded by 11:00 central time.

Bullish Flow
Rambus (RMBS) is up and calls are actively traded on unsubstantiated chatter that the chipmaker has won a court ruling. Shares are up $1.29 to $17.91 and 26,000 calls had traded midday. The volume represents 4X the expected for midday and compares to 4,390 puts. November 18 and 20 calls are the most actives, as some players take positions on hopes today’s rally in Rambus might continue.

Cephalon (CEPH) is seeing heavy trading ahead of a conference tomorrow. Shares are up 14 cents to $58.40 and 33K calls traded, compared to 1220 puts. December 60 calls are the most actives and it appears that a strategist sold to close a large position in those calls, and then bought-to-open a similar position in February 60 and 65 call options.

Bearish Order Flow
Put activity is picking up in Collective Brands (PSS). Shares are up 49 cents to $20.41 and 4725 puts traded by midday, which represents 7X the recent average daily volume for PSS. The focus is on December and January 20 puts at the $20 strike, with 2500 and 1150 contracts traded, respectively. There is no news on the company today, but it appears that premium buyers are initiating some of today’s trades and possibly looking for PSS to dip back below $20 in the weeks ahead.

The CBOE Volatility Index (.VIX) is down .66 to 23.53 and morning trades in the volatility index include a November 20 - 22.5 put spread, which was bought at a 50 cent debit, 25000X. This might be a closing trade because significant open interest exists in both contracts. However, it might also be a new position and a bet that volatility will continue falling over the next 8 trading sessions. VIX November options expire next Wednesday.

Unusual Volume (2x or greater average daily volume)
Abercrombie (ANF) options volume is running 2X the usual. 23,000 contracts traded and call volume accounts for 59 percent of today’s volume.

Options activity in Applied Materials (AMAT) rose to 2X the usual, with 21,000 traded and call volume representing about 88 percent of the activity.

Ensco (ESV) options activity is running 6X the usual. 20,000 contracts traded and put volume accounting for about 67 percent of the activity.

Increasing volume was also seen in Saks (SKS), AES, and the iShares Taiwan Fund (EWT).

Implied Volatility Movers
Ariad Pharmaceuticals (ARIA) implied volatility is climbing amid active call buying Monday. Shares are up 25 cents to $2.42 and 1485 calls traded, which represents 3.8X the normal and, of those trades, 63 percent hit ask-side of the bid-ask spread, according to data from WhatsTrading.com. The interest in ARIA calls has implied vols moving up to 154, from about 151 late Friday and 141 one week ago.

Implied volatility is also higher in ArvinMeritor (ARM), Bank of America (BAC), and Electro Optimal Sciences (MELA). Meanwhile, implied volatility is lower in Rockwell (ROK), Energy Conversion (ENER), and Dish Networks (DISH).

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