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High Dosage of Put Volume Hits Medco Health Solutions Inc.

Sarah Wasserman (swasserman@sir-inc.com)

3/11/2010 3:46:04 PM

Option players have flocked to Medco Health Solutions Inc. (MHS) in force today, sending volume surging to 11 times the health care concern's average. This activity has been heavily skewed toward puts, with 20,000 of these bearish bets crossing the tape, compared to just 530 calls.

Looking into specific activity, the front-month series has seen the majority of today's action. And with March expiration approaching next week, it appears that one trader is counting on MHS to tumble in the very near term. This morning, a block of 5,000 March 60 puts crossed the tape at the bid price, suggesting they were sold. At the same time, 5,000 March 65 puts traded at the ask price, implying they were bought. Assuming these puts are newly added, it appears this bearish bettor opted to run a long put spread on MHS.

In a long put spread, the trader sells an out-of-the-money put, and purchases an equal amount of at-or in-the-money puts. As with a long put, the trader is bearish; however, the key difference between the long put and long put spread, is that the trader has a downside target. In other words, the long put player believes the stock will fall, but has a rough sense of where the stock will hit the brakes.

With MHS currently trading around $64.23, this option player is counting on the equity to remain below the $65 level, hopefully falling a bit deeper in the money.

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Nike Inc.'s Implieds March Higher Ahead of Earnings

Joseph Hargett (jhargett@sir-inc.com)

3/11/2010 3:31:04 PM

Nike Inc. (NKE) has seen its implied volatility spike sharply higher in recent weeks. The stock's Schaeffer's Volatility Index (SVI) tagged an annual low of about 12% in early January, but this reading has since spiked 142% to its current perch at 29%. For a point of comparison, NKE's one-month historical volatility currently arrives at 14.03%.

What's more, NKE's SVI could head even higher, as the company's quarterly earnings report draws nearer. For the record, NKE is scheduled to release its quarterly earnings report after the close of trading on March 17. Currently, Wall Street is looking for a profit of 88 cents per share, some 11 cents better than the same quarter last year. Historically, NKE has been a solid performer in the earnings confessional, besting the consensus estimate in each of the past four reporting periods by an average of more than 10%.

Checking in with data from the Chicago Board Options Exchange (CBOE) and International Securities Exchange (ISE), we find that activity among options traders is quite bullish ahead of the event. Specifically, the equity's 10-day ISE/CBOE call/put volume ratio of 1.93 ranks above 94% of all those taken in the past year.

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GameStop Buyout Rumors Spark Flood of Call Volume

Joseph Hargett (jhargett@sir-inc.com)

3/11/2010 3:06:06 PM

GameStop Corp. (GME) has soared nearly 5% so far today, as traders react to rumors that the company might be a takeover target. While the rumors have been cast in doubt by analysts, this hasn't stopped options traders from jumping on the security. Specifically, volume has swelled to more than 94,000 contracts, outpacing the stock's daily average by more than six to one. Additionally, it would seem that the bulls are in charge of GME's options trading, as more than 62% of today's option volume has traded on the call side, according to data from WhatsTrading.com.

The most popular call on the session is the March 20 strike, where 16,500 contracts have changed hands on open interest of just 7,928 contracts, while another 10,000 contracts traded on GME's April 20 call. On the put side, options traders have sent some 8,000 contracts across the tape at both the March 18 and March 19 strikes, which sport open interest of 7,353 contracts and 5,425 contracts, respectively.

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Option Players Drive Call Volume Up on Deere & Company

Sarah Wasserman (swasserman@sir-inc.com)

3/11/2010 2:53:26 PM

Deere & Company (DE) has had a surge in call activity today, with volume soaring to 8,501 -- nearly double the equity's expected call volume.

The day's most popular strike has been the March 60 call, which has seen volume of 4,360. With 71% of these contracts trading on the ask side, it seems the majority of these calls were bought. Open interest at this strike is currently at 13,845 contracts, so we'll have to wait until tomorrow to determine if today's volume will translate into new positions.

The back-month April 55 call has also been a favorite among traders today, with volume of 1,943 contracts trading on open interest of 348 -- indicating the addition of fresh contracts. Furthermore, 92% of these calls traded at the ask price, pointing to buy-to-open activity.

Today's high call volume is in line with recent trends on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE). DE's 10-day ISE/CBOE call/put volume ratio checks in at 2.81, as calls bought to open have nearly tripled puts bought to open in the last 10 sessions. What's more, this ratio ranks in the 94th percentile, revealing that traders have shown a greater preference for calls only 6% of the time during the past year.

At last check, DE had given up 2.9%, to explore the $56.80 area.

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Bears Climb Aboard Royal Caribbean Cruises Ltd.

Sarah Wasserman (swasserman@sir-inc.com)

3/11/2010 1:03:26 PM

Option activity ramped up on Royal Caribbean Cruises Ltd. (RCL) Wednesday, with put volume soaring to nearly double the cruise concern's daily average. Specifically, RCL had volume of over 6,700 puts change hands, well above the expected average put volume of just 3,600 contracts.

The stock's Schaeffer's put/call open interest ratio (SOIR) stands at 1.57, in the 73rd annual percentile, revealing that short-term option players have been more bearish toward RCL only 27% of the time during the past year.

The April 28 put saw the most activity Wednesday, with 4,656 contracts trading on open interest of just 277, indicating a surge of new positions at this strike. What's more, 93% traded on the ask side, indicating that the majority of these puts were bought to open.

What's more, it appears that one trader was responsible for most, if not all, the volume at this strike. Wednesday morning, seven blocks totaling 4,349 April 28 puts crossed the tape at the ask price. Overnight, open interest at this strike increased by 4,458 positions, revealing buy-to-open activity. By buying to open the April 28 put, the trader is bearishly betting that RCL will coast into April expiration below the $28 level.

RCL has surrendered 21% since the start of 2010, and is currently exploring the $30.60 level.

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Commentary by WhatsTrading.com

Unusual Activity Roundup, March 11

3/11/2010 4:19:53 PM

Some less actively traded names seeing bullish order flow: Polycom (PLCM), Phillips Van Heusen (PVH), GMXR (also pre-earnings) Bearish order flow: Savvis (SVY), Intersil (ISIL), Varian Semi (VEA) Post Earnings: IMAX, Clean Energy Fuels (CLNE), ATP Oil and Gas (ATPG) Pre-Earnings: Ann Taylor (ANN), National Semi (NSM), Aeropostale (ARO) Ex-div.: Navios Maritime (NM), Burger King (BK), Mercury General (MCY)

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Cheesecake Factory Inc (CAKE) $26.66 +2.40%

3/11/2010 2:19:54 PM

Cheesecake Factory (CAKE) touched a new 52-week high and was recently up 60 cents to $26.63. Options volume is running 10X the average daily, with some unusual activity seen in July and October puts. A total of 20K puts traded, compared to 2290 call options. July 22.5s are the most actives. 7723 traded (89 percent ask). The top two trades were 607 and 594 contracts at 65 cents. July 20 puts are trading 92 percent on the bid and so some of today's flow might be spreads. July 25, 17.5, Oct 20, and Oct 17.5 puts are seeing interest as well, with volume exceeding open interest in all six contracts. No news today. CAKE was the subject of a downgrade Tuesday (MKM Partners to Neutral). Implied volatility is flat around 35 percent.

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Terra Industries (TRA) $46.88 -0.15%

3/11/2010 12:19:54 PM

Terra Industries (TRA) is off 10 cents to $46.85 and an investor pays 30 cents for the Mar 45 - 46 put spread, 15000X. It might roll a position up in strikes, but seems like a defensive play. CF Industries (CF) has started its exchange offer for TRA common stock at $37.15 in cash plus .0953 of a share of CF. CNBC's Faber said yesterday that Yara's Board of Directors is meeting today to see if they want to revise, perhaps top, CF's bid. They have 5 days to do so. The put spread is likely a short-term hedge should, for whatever reason, the buyout fall apart. March options come off the board at the end of next week.

Read more at WhatsTrading.com

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Citigroup Inc (C) $4.02 +1.53%

3/11/2010 10:59:56 AM

Interest in Citi (C) calls continues. 1.47 million traded in the name yesterday, creating 223,000 contracts in new open interest. Today, shares are up 6 cents to $4.02 and one player pays 10 cents for June 5 calls, 50000X. 240K calls and 66K puts traded in Citi during the first 30 minutes Thursday.

Read more at WhatsTrading.com

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Waters Corp. (WAT) $65.07 +0.0%

3/11/2010 10:19:55 AM

Waters Corp (WAT) was mentioned intraday Wednesday, with unusual call action and it continued throughout the day with shares closing near highs, up 1.6% while IV spiked 13% higher. More than 6,600 calls traded, which is 35X average, and comes after the recent takeover of Millipore has many thinking Waters could be next as a filtration play. The March 65/70 and April 70 calls attracted buyers, mostly offer side on the 100+ contract orders. Shares trade 15.4X earnings and 18.8X cash flow. The recent breakout has shares eyeing a move to 2008 highs around $70, although a takeover would likely fetch a 25% or more premium.

Read more at WhatsTrading.com

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Valero Energy (VLO) $20.55 +5.23%

3/10/2010 3:19:57 PM

Oil refiner Valero (VLO) is up $1 to $20.53 and options trading is brisk Wednesday, with 33,000 calls and 19,000 puts on the tape so far. The gains in the shares and the heightened options activity comes the day after Reuters reported that PBF Investments might be interested in buying VLO's Paulsboro refinery in New Jersey. Shares are now not far from session highs and the options action is really scattered: March 20 calls, March 20 puts, Sep 23 calls, Sep 25 calls, April 21 calls, Mar 19 calls, Jan11 20 puts, Mar 21 calls, June 18 calls. Meanwhile, implied volatility is up about 2.5 percent to 32.

Read more at WhatsTrading.com

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CBOE Volatility Index (.VIX) $18.23 +1.73%

3/10/2010 2:19:57 PM

CBOE Volatility Index (.VIX) is up .29 to 18.21 and looking to extend this week's winning streak. After falling during 17 of 18 trading sessions, VIX is up 4.5 percent since Friday and might be seeing some strength due to upcoming expirations -- VIX options a week from today and then the "Quadruple Witch" next Friday. In the options, noteworthy trades in the VIX today include two large blocks totaling 80K May 35 calls on the bid of 45 and 50 cents per contract. These blocks printed in morning action and, since it looks opening, might reflect expecations that VIX is unlikely to make a signficant move higher by the VIX May expiration (69 days.)

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Kinetic Concepts Inc (KCI) $43.99 +1.57%

3/10/2010 1:00:01 PM

Kinetic Concepts (KCI) is halted, news pending ahead of a trial verdict against Smith and Nephew. Shares are up 68 cents to $43.99 and options were active ahead of the halt, with 16K puts and 7500 calls traded. The top trades: 4700 and 4600 March 40 puts on the bid, 75 cents per contract. Looks like put sellers. Another player sold 1750 Mar 50 calls at an average of 37.5 cents. Implied volatility is up about 6 percent to 78.

Read more at WhatsTrading.com

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Microsoft Corp (MSFT) $29.02 +0.76%

3/10/2010 12:19:57 PM

The top equity options trade so far today is a block of 38K January 35 calls on Microsoft (MSFT). It was bought at 52 cents per contract and not tied to stock, according to a source on the floor. It might close an existing position, as open interest is 77.7K.

Read more at WhatsTrading.com

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Norfolk Southern (NSC) $53.74 +0.0%

3/10/2010 10:19:58 AM

Norfolk Southern (NSC) is often considered the best managed rail company, but the stock is not at 52 week highs like it's counterparts Union Pacific (UNP) and Kansas City Southern (KSU). That could change with a break of $55, which would target a move to $60. Option traders were decisively bullish Tuesday, with 4,425 calls trading, 3X average, and 90% offer side buys. The April and June $55 calls both saw buyers, with 2,800 in April $55's changed hands. Shares trade 13.2X earnings and 18X cash value, and recently were raised to Overweight at Barclays with a $62 target. Recent improvements in pricing, shipping volumes, and improved outlook for coal were cited as reasons for the upgrade.

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More Options Commentaries and Observations by Schaeffer�s

Market Recap: S&P 500 Flirting with Fresh 52-Week High

The stock market continued its recent trend of timid price action today, with U.S. equities tentatively testing the waters on either side of the breakeven line. Providing fuel for the bulls was the day's unemployment data, with the Labor Department reporting that initial claims for jobless benefits dropped by 6,000 last week, falling roughly in line with consensus expectations. Additionally, the Commerce Department reported a 6.6% drop in the U.S. trade gap in January, defying predictions for an increase. However, optimism was tempered by troubling economic news out of China, with the emerging market's inflation rate surging to 2.7% -- a 16-month high. Some skeptics now fear that China may hike interest rates, potentially slowing the country's breakneck economic growth. Against this mixed backdrop, the major market indexes spent most of the day well within their recent trading ranges. However, an eleventh-hour buying boost helped stocks finish the day on a high note.

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Options Strategy of the Day: The Short Put Ladder

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Sizing Up Heavy Call Activity on Star Scientific, Inc.

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Palm Inc. at a Technical and Sentiment Crossroads as Earnings Near

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