Earnings Warnings Buckle Knees, As Market Struggles Off The Canvas

The market is reacting to a one-two punch combination this morning: Yesterday’s silence by Chairman Al on an imminent round of interest-rate cuts was the jab and the slash in earnings estimates by three high-profile firms (Nortel (NT | Quote | Chart | News | PowerRating), Palm (PALM | Quote | Chart | News | PowerRating) and Walt Disney (DIS | Quote | Chart | News | PowerRating)) was the over-hand right… laying out the major indexes and for intents and purposes pretty much every stock on my board. In any event, our current entrants have more than a fightin’ chance…actual contenders, here.

With Softie (MSFT | Quote | Chart | News | PowerRating) only off less than a buck, the April 55/65 call spread we were looking at is within striking distance. The two butters we held out to be more than reasonable risk/reward are either in the money or heading that way. Many of you have asked about legging into the butters… buying a leg (or legs) and selling the middle upon the move… that’s fine! Some have put these on for free or a credit. Let ‘em ride… don’t fret with them.

Legging in with vertical spreads works, too. With a month to go, there are lots of things you can do with these strategies, we’re going to let some time come out of them.

If you’ve gone for the butters we have spoken about in this column ( and/or Condors for those with whom I have been corresponding by e-mail), you have a wider range to work with, and the reward can be a lot larger. Of course, unless you have legged in advantageously, the cost can be higher, too. I’ve said we have been looking for lower prices and then sideways movement at best for the next few months. Finding and initiating these condors is where you should spend your energies.

While the early morning stock market is on its knees, the options market seems to be out cold.  Order flow has its arms up, hiding from sight, a phenomenon that is keeping today’s pop in volatility in check. Just how “non-existent’ is “non-existent”?  Today’s flow registers a meager 1.1 on a scale of 1.0 to 10.0 with 1.9 being the current 30-day moving average. We’ve seen a retreat to the corner unlike any over the past two years.

Overall, call sellers are the most prominent group, with put sellers following in a distant second. A glance at our search engines reveals some unusual activity in the following names. (PALM | Quote | Chart | News | PowerRating) has heavier-than-usual activity, with call buyers racing in to take advantage of the dip in price after the earnings announcement. (WM | Quote | Chart | News | PowerRating) call sellers have come on the scene today.

Due to a technical malfunction our pre-open data is unavailable this morning.

First hour order volume was quite low.  Overall, call sellers and buyers were almost even, with sellers slightly edging out buyers 1:1.  Put sellers lead buyers 3:2.  In first hour activity, (JDSU | Quote | Chart | News | PowerRating) call sellers destroyed buyers 2:1, while put sellers trounce buyers 5:1. (CIEN | Quote | Chart | News | PowerRating) call buyers showed up leading sellers 5:1. (NT | Quote | Chart | News | PowerRating) call buyers showed up leading sellers 3:1. LU call buyers showed up leading sellers 7:1. (JNJ | Quote | Chart | News | PowerRating) call sellers crushed buyers 3:1.

A look at our open butterflies reveals that they are on the comeback: Recall that we got in (QCOM | Quote | Chart | News | PowerRating) April 40/45/50 put butterfly at under $1. We got in the (CIEN | Quote | Chart | News | PowerRating) April 40/45/50 put butterfly, at around 3/4.

As I have made clear before, Butters are excellent strategies for lower volatility or sideways moving markets. They are a very safe way to sell premium.

Please continue to write me tonys@tradingmarkets.com