Today’s tickers: CHK, MER, RIGL, MYL, HRS, IR, LIZ

CHK - – We have an update to report on that intriguing call-spread activity to report this morning out of oil and natural gas extractor Chesapeake Energy, whose shares rose 2% to $45.79 following mixed oil inventory data. Chesapeake shares are more than $23 off their high of July 2, and the direction of a 20,000-lot call spread entered this morning could provide key insight into the market’s expectation of its future direction. We’ve received confirmation that the call spread in question was bought, rather than sold, at a debit of $1.85, while the 14,000 lots report in 40-strike puts were sold for $2.30. This trade was entered in connection with a stock transaction, but could indicate bullish expectations for the share price following on from the recent pullback. A look at open interest shows option traders still hold more than twice as many calls as puts in Chesapeake.

MER - We haven’t heard much from Merrill Lynch since last Monday’s momentous writedown announcement – and maybe the company prefers it that way. Shares have gained 15% since that time. But this morning’s move from well-known Ladenburg Thalmann analyst Richard Bove to cut his price target on the stock from $30 to $25 in the belief that the company faces a longer-term struggle to regain profitability has some option traders positioning today for a new test below $25 in the coming months. One trader used a 7,400-lot put spread in the September contract between strikes 20 and 25 to express this belief, buying the 25’s for $1.45 and funding the purchase with the sale of 20-strike puts for 45 cents. The resulting $1.00 debit must be made back with a decline for Merrill shares below $24 by mid-September.

RIGL - Shares in Rigel Pharmaceuticals, the maker of small-molecule drugs for asthma and cancer, dropped 4% to $22.98 on a wider-than-expected loss for the second quarter. Its options activity caught our attention for a couple of reasons – first was the fact that its implied volatility reading actually rose 45% to 93.9% after the numbers were out, rather than pulling back. This compares to a historic volatility reading of 57.7% and tells us that option traders are looking for more than twice as much price risk over the next 30 days. Option traders are playing this via a couple of strategies – first through fresh positioning in August 20 strike puts, many of which have been sold in possible contrarian positioning against the current share price action. Elsewhere we saw a 1,000 lot position go through in September 22.50 calls for $2.20 – though the direction of this trade cannot be confirmed. All of the volume here helped send Rigel’s overall option volume to nearly 9 times the normal level. It’s possible that option traders believe there’s some clinical trial information that could move the stock more than the earnings did. Market observers may recall that back in mid-December, Rigel shares more than doubled in a single session following promising phase-II clinical trial results for its rheumatoid arthritis drug. It’s possible that Shares have come down about $10 since that time, and in the interim the company has also seen an 83% rise in short positions on the stock. Short positions now represent about 19% of the float. Option traders, meanwhile, hold nearly 3 times as many call positions as puts on the stock.

MYL - The country’s largest maker of generic drugs, Mylan Inc, also reported a Q2 net loss, but better-than-expected sales figures helped send the stock 5% higher to $13.82. On the options front, we’re seeing contracts to buy and sell Mylan shares trade at 10 times the normal level, due in large part to a trader resorting to a calendar call spread at the close-to-the-money 15 strike in October and January. If this were a conventional call spread, the trader would have sold the October 15’s and put the 75 cent premium toward the $1.41 purchase price of the January calls. The trader here would be looking to benefit from the more rapid time decay of the nearer-term contract, assuming Mylan shares show little to no propensity for large movement.

HRS - Volatility sellers appear to have targeted options in military communication equipment maker Harris Corp. Harris shares (and its call open interest) rose dramatically this past spring on speculation that the company might be an acquisition target, rumors so detailed that its CEO publicly dispelled them in early June. The public disavowals appear to have worked – Harris Corp shares are down nearly 25% since May 30. Today’s increase in options trading volume to nearly 13 times the normal level shows at least one trader wagering on no dark horses in the M&A stakes at least into the first part of next year. The trader here appears to have sold a February 45/55 strangle, taking in the $6.69 combined premium in the expectation that shares will remain bound between those strike prices by mid-February. Given that Harris Corp’s implied volatility reading (38.2%) is ticking in lower than its historic reading (39.6%), the trader may have opted for the February contract in order to benefit from greater time value, which tends to equal higher premiums. Harris Corp shares are 1% higher at $49.18 today – the current valuation represents 14.4 times its earnings.

IR - We recorded another sizable sold strangle in industrial supplier Ingersoll-Rand, this one big enough to send option trading volume to 7 times the normal level. The trader in this case appears to have sold a 10,000-lot strangle in the December between the 35 and 37.50 strikes for a combined premium of $5.23. Shares in the company are down almost 20% for the year-to-date and the current share price represents only about an 11% premium to the 52-week low. The seller of this strangle expects the Ingersoll-Rand’s share price to remain at these relatively depressed levels for the duration of the year.

LIZ - Liz Claiborne – Shares in the women’s wear maker are 1.1% lower at $13.46 as we register an increase in options trading volume to nearly 30 times the normal level, a full week ahead of the company’s earnings announcement. We’re recording heavy volume, apparently in excess of open interest, at the October 15 put line, as well as at the 12.50 strike. Implied volatility at 67% shows a substantial elevation above the 59% historic reading on the stock.

Ah, big day today!

The Fed wimped out and held rates at 2%, utterly ignoring the fact that their relentless destruction of the dollar that began in September of ‘07 was the fuel that took oil from $70 a barrel to $145 a barrel in the first place.  Bernanke’s policy of talk loudly about containing inflation but showing up at the actual policy meetings with a tickle stick would have Teddy Roosevelt spinning in his grave is he wasn’t stuffed and mounted at the Met.

A 2% Fed Funds rate is a joke.  How’s your morgage payment?  Did it come down from 6.5% last August to 3.25% or is this just a way for US, the taxpayers, to fund an increase of what I like to call the lending rate crack spread for the financials so they can continue to stick it to us on rates, tighten lending requirements and continue to foreclose on 8,500 families a day because they can’t afford their 9% ARMs while the bank gets to cry to the Fed that they can’t scrape by paying 3% or even 2.3% for that matter.  What a friggin’ joke!

So we had the dollar literally flying up ahead of the Fed as Bernanke had telegraphed, if not a rate raise, then certainly a firm indication that it is time to raise rates - but noooooooooooooooo, only Richard Fisher has the balls to say enough is enough and it’s time to take back the dollar and put money back INTO American pockets.  I can’t wait to read the minutes of this meeting where a 5% run in the dollar is played down as not being responsible for a 15% drop in the CRB, which is the only thing that gives Bernanke the slack to say inflation is moderating in the fist place.  Hey Ben - strong dollar = low inflation, get it???  Apparently not…

Now we have to see if we can pawn off $17Bn worth of 10-year notes at 4% today while "Helicopter Ben" dumps hundreds of Billions of  free (OK, 2%) money on the financials so they can continue to lever up while they drive another 357,000 families out of their homes between now and the next meeting on Sept. 16th.  It’s not just Ben, of course, it takes a village full of idiots and we call ours Washington where our "leaders" have still failed to do anything at all to address the housing problem.

Bailing out the lenders and the investors while 8,500 homes a day are foreclosed (avg $250,000 per home = $2Bn/day) is like having a pipe leaking in the basement and placing orders for more and more paper towels to try to soak up the mess before your foundation cracks.  It’s actually even dumber than that, more like having a bathtub that is overflowing upstairs and water is coming through the ceiling to the kitchen and your solution is to keep putting more and more expensive pillows and blankets underneath it to soak up the water and hope the water magically shuts itself off before the whole bathtub ends up on your counter top.  If you were watching that scene in a movie, you would think nobody can be that stupid yet here is George Bush - the embodiment of everything that is wrong with 21st century politics.

It’s all about oil today.  Inventory report is at 10:35 and we already know the NYMEX crooks shorted Cushing 20M barrels for the month so we are averaging close to 1Mbd less imports than we should be.  Even with a 5M barrel shortfall in deliveries this morning, Platts is still forecasting just a 1.2M barrel draw in crude and a 1.4Mb draw in gasoline, which is more due to the very low refinery production we’ve been getting lately (running at just 87% of capacity last week even without a hurricane).  Well, if we’re not going to import any oil and we’re not going to refine the oil we do have - should we really be surprised to see a draw in inventories?   The actual number and the actual reaction will be very telling today. 

I’m willing to take a chance on some USO Sept $94 calls at $7 ahead of inventory, looking for a quick $1 and, if not, we can always sell the Aug $94s for $4, leaving us with a pretty mellow spread.  Once the Aug $94s expire, all I have to do is sell the Sept whatevers for $3 or more and I end up with a free vertical.  Right now the Sept $104s are going for $3.05 so that’s a pretty good leeway to work into.  Let’s make that a naked 10 in our Butterfly Portfolio and work our way into a spread unless we get our $1+, then it’s a quick $1,000 and we’re out.  Let’s stay on our toes though, CNBC is claiming that "analysts" are expecting a BUILD in crude, setting the market up for disappointment based on their fake research or incompetent reporting of the real research - it’s hard to tell which with these guys…

On the bright side, Paris Hilton has solved the energy crisis.  Also great in video today is this commercial for the new Republican slogan, "The Change You Deserve," which I bielive refers to the change left in your bank account after buying a tank of gas or the change of address notices being sent out by 225,000 foreclosed families each month.

Bush is in Asia and he will be changing his tune as he meets our Chinese masters later this week to help them kick off the Olympics while breaking ground on our brand new $434M embassy.  Asian markets were well up today, with Hong Kong closed for the Olympics  and the Nikkei up at the 2.5% rule but Pakistan fell 3.62% as the President had to cancel his trip to Beijing since it turns out it wasn’t likely he would still have a job when he came home.  Europe is actually flat an unexciting this morning ahead of our open.

So once again, it is all about the POO.  FRE had a loss but not too unexpected and cut the dividend, which is a sensible thing to do when you have a loss and they are getting a nice over-reaction we will work on at the open, maybe a nice $10KX play on the $7 calls if they are cheap or maybe buying the stock and selling those calls if they are not.

Let’s be careful out there but holding 2/3 of yesterday’s gains will be a win today.