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TFC Commodity Trading Forum

Wall Street's Monday Lunch Options

Chris Tyler, Optionetics.com
January 3, 2011

Bulls kick off 2011 in strong form on seasonal inflows and a batch of mixed but properly packaged economic reports in keeping with optimistic expectations. As of 10:45 ET the SP-500 (SPY) is up 1.25% and making for slightly less “VIX’ing” and difficult-to-handle tickers for bulls.

Kicking off the new calendar year and the tickers “BULL” “AT” “WORK” are flickering fairly solid and uniform green in Monday’s first half on varied but merrily-viewed manufacturing data from across-both-ponds and stateside.

In the spotlight, weaker-than-expected China PMI data stoked bulls fancy in overseas trading with Asia’s Shanghai Index jumping 1.76%.

Over the weekend PMI data showed Chinese manufacturing slipped for the first time in five months but the December reading of 53.9 marks the 22nd straight month in which the index has been expansion territory.

While potentially a sore spot during other economic circumstances, with investors concerned of late over continued monetary tightening by China’s central bank to guard against inflation; the “acceptable” slowdown has been treated with kids gloves rather than hot mitts by bulls.

From across-the-other-pond, euro zone manufacturing grew from 55.3 to 57.1 and above initial reports of 56.8. The better-than-expected result owes its strength in large part to Germany’s near-record growth.

Europe’s largest economy saw its manufacturing rise to 60.7 in December and up 2.6 points from the prior month, powered by the Germany’s export-driven expansion.

Stateside, an intraday release saw the ISM Index come in mostly in-line with expectations and flat for the period. December data rose to 57.0 from November’s 56.6 but was just shy of Street views calling for 57.3.

Separately, construction spending doubled forecasts with its gain of 0.4% following the prior month’s increase of 0.7%.

In those sometimes intertwined markets of influence, hard commodity plays are somewhat interestingly failing to lead during Monday’s heralded bout of “green shoots” optimism with trader reaction actually showing mildly mixed flickering green and red lights intraday.

The typically leading iShares Silver ETF (SLV) is struggling to maintain a bid with its rather modest gainer of 0.25%. And for its part, some bulls are likely going buggy with COMEX Gold (GLD) after it fully reversed its opening bid and is now off -0.22%.

At the same time, “bugs and bulls” would be hard-pressed to point at the US Greenback (UUP) as Monday’s villain for weakness in the dollar-denominated commodities. Intraday, UUP is up by about 0.50% but finding overhead resistance at its 50SMA which was broken with a bearish gap on Friday.

The highly-liquid iShares 20-Year (TLT) is off -0.50% as trader’s look to collectively embrace Monday’s mostly stronger global data and test the veracity of Friday’s breakout from a three-week long congestion pattern developed around its April to October 2010 78% Fibonacci level.

On the corporate side, one hard commodity play demonstrating leadership is aluminum concern and Dow component Alcoa (AA). Shares of AA are up a handy 4.55% to 16.10 and striking its best levels since last January.

Alcoa saw its shares upgraded this morning by Deutsche Bank to “Buy” from “Hold” and its price target lifted from $14 to $22 per share. Deutsche cited the increased likelihood for stronger base prices in aluminum during 2011 and Alcoa’s own operational turnaround efforts as key factors.

Elsewhere, fellow Dow constituent BofA (BAC) is leading that index higher with its near 5% gainer. The banker quelled fears related to repurchase agreements with Fannie Mae (FNM) and Freddie Mac (FRE) after it stated it will settle with the two government-sponsored enterprises.

The move by BofA will cost it about $3.0B in Q4 but has investors reacting enthusiastically on the premise the company is finally cleaning house of its mortgage mess tied to the acquisition of lender Countrywide.

In other less Mad Money spots of influence, CNBC’s After Hours market host Jim Cramer is seeing his “F.A.D.S. C.A.N.” stocks enjoying the early role of leadership in 2011 with gains ranging from 1.50% for online digital entertainment goliath Netflix (NFLX) to 4.55% for internet networking shop F5 Networks (FFIV).

Within FADSCAN, which includes Decker’s (DECK), Salesforce (CRM), Chipotle (CMG) and Amazon (AMZN); shares of Apple (AAPL) are making a bonafide difference to market bulls.

Apple, the second largest capitalized company in the US and reigning gadget king is up a commanding 2.20% and hitting fresh all-time-highs from a tight four-week long wedging pattern. Shares are benefitting from market winds and broker ISI’s “Buy” reit and target lift to $400.

Finally and in those sometimes accurate heat-seeking option markets, bulls in Apple are sampling calls by a two-to-one margin over puts but not wholly devouring the “right to buy shares at” type contracts.

Total option volume in AAPL is a shade over 140,000 and off its daily average sweet spot of about 250,000 entering the lunchtime nosh on the east coast.

Most active on Monday’s menu, the action thus far shows a virtual tie of about 12,500 contracts apiece in the January Weekly 330 call and regular-way Jan 330s. A skew of about 10 absolute volatility points with the latter contract priced at a richer 32% IV is near two-plus month highs and due to Apple’s pending earnings release on January 18.

Traders collectively appear to be enjoying the idea of the long calendar between the two contracts in an attempt to collect on the more theta sensitive contract to help finance earnings-related positions.

Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site