Today’s tickers: LEH, SCHW, AKAM, KG, APO, TGT, ORCL, KO

LEH - Shares in Lehman Brothers bounded sharply out of the gate with a 10% gain to $15.09 on speculation that the firm might be bought by Korea Development Bank. The move in Lehman comes a day after respected analyst Richard Bove floated the notion of Lehman’s vulnerability to a hostile takeover bid, and amid generally bullish action in financials today on back of interest rate-dovish and largely reactive, rather than proactive, rhetoric from Fed chairman Ben Bernanke speaking in Jackson Hole. Response from option traders has been interesting, not least in the October contract, where one fund a trader appears to have played against the “easy-fix” rumors by buying a long 8870-lot put spread between strikes 2.50 and 5.00. This trade was entered for a 25-cent debit, creating an initial break even of $4.75 – requiring an almost disastrous $10 drop. The trader stands to gain as much as $2.25 – 9 times the money at risk – if Lehman shares make a cataclysmic drop, but don’t break below the $2.50 level. In another October play, traders may have sold 27-strike calls at 22 cents apiece in order to fund a long collar between strikes 12.50 and 20 – a protective play on an underlying stock position that would otherwise cost 33 cents to put on.

SCHW - Rumors of a Deutsche Bank bid for Charles Schwab appear to be fueling speculative options activity in the brokerage this morning as shares read 2.5% higher at $23.59. The rumors have pumped implied volatility 19.3% higher to 47.8% as options trade at 7 times the normal volume. With calls outtrading puts by more than 8 to 1, traders are clearly buying calls into bullish momentum, particularly at the September 25 line, with interest spilling over into this strike price in the October contract. At least one trader opted to take the other side of the bet, buying a 1,500-lot long position in September 25 puts for $1.85 per contract.

AKAM - Takeover chatter, albeit of a more diffuse nature, is also coloring the volume in options of Internet content delivery company Akamai Technologies, whose shares are trading 5.5% higher at $23.85. Options volume has tripled against the daily average, with calls outmoving puts by more than 22 to 1. Buying interest has settled on front month calls at strikes 25 and 30, with volume at these same call strikes in the October contract trading to buyers and sellers. Implied volatility on all Akamai options is up more than 20% on the session at 54.1%.

KG - Shares in King Pharmaceuticals rose 7.2% to $12.05 today after disclosing that it had made a $1.4 billion bid to acquire Alpharma, that the company rejected. Option volume in King Pharmaceuticals tripled on the news, due largely to a spell of fresh buying in January 12.50 calls at $1.30 per contract. The premium on this position at $1.30 requires upside to $13.80 to break even, a level that would put King shares within $2 of its 52-week high set back in August 2007. King shares have hobbled this month since losing 17% in a single session after reporting a decline in Q2 profits of more than a third.

ALO - Meanwhile, Alpharma’s finding out that it’s good to be the….object of King’s affections. Shares rose more than 42% to $34.20 on the news – a premium to the $33-per-share bid that Alpharma nixe. The news has lit a fire under Alpharma calls, which are outpacing puts by nearly 3-to-1. Heaviest volume appears at the September 35 calls, which are trading mostly to the middle of the market, while calls at the 40 strike appear to have mostly sold. Activity at the December 35 line showed calls trade to the middle of the market at $2.10, while a trader on the put side roughly half an hour later appeared confident enough to sell 35-strike puts for $1.80 per strike.

TGT - Shares in quirky retailer Target are up 2.4% at $52.31, three days after reporting a decline in Q2 profits that still exceeded consensus street estimates. Profits were hurt by a consumer pullback in nonessential items, where Target has tended to excel. Slowing profits or none, it’s been a banner month for the retailer – its stock is up more than 17% this month alone. One trader looks to have positioned for stocks to remain above the $50 watermark into September expiration while taking in premium by selling a 3,500 put spread in the September contract between strikes 47.0 and 50. The trader took a 65 cent credit that represents the maximum potential profit to be yielded if both contracts expire worthless on September 19.

ORCL - A similar strategy was employed in options of Oracle, where a 3,000-lot spread using puts was deployed in the front month contract between strikes 22.50 and 24 as shares printed a 1.5% rise to $22.64. The spread involved here totaled 90 cents, which a bullish seller of the spread would take as a credit in hopes of seeing Oracle shares break their 52-week high of $23.62 by September 19. A buyer of the put spread would take a soberer angle, paying the 90-cents as a debit while betting on a widening of the spread between the two strikes that would result in both contracts being exercised. Bear in mind that the maximum profit for a long buyer of this put spread is just 60 cents – less than the money at risk in the form of the 90 cents paid for the position. In this case, both sides of the spread are reported at the middle of the market, so we cannot confirm whether this trade was entered by a buyer or a seller. Open interest shows existing call and put positions at a near-even split.

KO - Shares in Warren Buffett favorite Coca-Cola are up 1.3% to $54.20, pacing gains in the Dow today. Murmurings of a global slowdown in recent sessions have sparked some market investors to call for positioning away from large-multinationals with heavy European exposure , and option activity over the past week has shown some signs of traders positioning more defensively in December/January contracts in some multinational tickers. It’s in this light that the action in Coca-Cola is interesting, as it appears that a trader entered a 7,000-lot calendar put spread, selling 50-strike puts in the January 2010 $4.00 and buying the same position in the January ’09 contract for $1.60. Along with a $2.40 initial credit, the trader gets some defensive cover against a 7% pullback between now and mid-January.

Can we finally stop the madness?

This has been one of the most ridiculous weeks in the markets I can remember.  It’s been very tough as we hung onto positions and spent a lot of money buying out our beaten down callers and then going into yesterday’s close without new covers - very painful but, as I’ve been saying all week, it’s like walking through Wonderland - everything is going crazy and it’s easy to get sucked into the madness - the only logical thing to do is follow the rabbit (our trading plan).

We’re waiting for Uncle Ben to tell us about "Financial Stability" at 10 am but our bets are already made as we jumped all over the financial meltdown and laughed off the "oil rally" for the farce that it is.  We are heavy long in GOOG and heavy short in SU in the Day Trading Portflio along with our UYG calls so that’s the best indication of our stance for the day.  It’s almost the exact opposite of Cramer’s advice in yesterday’s mid-day Mad Money segment but I think most of the members were with me, taking a stand against the madness that’s been moving the markets this week. 

We have not been this invested AND this exposed in the LTP since last summer’s melt-down so I really hope we got the timing right.  If not, we have a 100-point cushion before we get back to where we uncovered in the morning so a re-cover will not be so terrible and these are the kinds of chances you should take if you have conviction in your positions.  Right now (8 am) it does look like we’re going to get a nice open but that changed since I went out for coffee from a flat open at 7:30 so who knows what will happen 90 whole minutes from now.  I’m still looking at 11,450 as a must hold on the Dow and 8,300 on the NYSE.  It would be nice if the Nas can get back over 2,400 but if it isn’t led by the SOX moving up off the 360 line (50 dma), I don’t want to know about it…

Asia didn’t want to know about Financial Stability this morning as the Nikkei fell another 86 points to 12,666 and the Shanghai Composite closed down 1.7% at a pathetic 256.  The Hang Seng found a way to hold 20,000 as the market was closed for a Typhoon and they remain 392 points above that critical line which, at an average loss of 250 points a day this week, they were in real danger of hitting.  Pakistan dropped back below the critical 10,000 mark as terrorist activity stepped up in that country, losing 2.3% on the day’s trading, down 33% since April.  All of Asia is at that critical 33% mark so next week will be very important there but a turn up in our financials should rally Japan and begin to pull Asia back up with it.

Uncertainties over the U.S. credit woes and the Chinese economy, and increased stock selling by foreigners continued to weigh on investor sentiment, pushing most investors into a wait-and-see stance, said Kim Joong-Hyun, an analyst at Goodmorning Shinhan Securities.  "Investors seem to have almost given up on hopes for stocks for now," said Samsung Securities’ analyst Oh Hyun-Seok. Among decliners, most major exporters extended losses from the previous session due to concerns about global economic condition, said analysts.

One bright spot over in Asia is a report that TV sales continue to be very strong.  This is good for our outlook on semis as well as our long-standing TXN positions as well as our new SNDK play that we took for the small portfolios yesterday as the economy may suck but consumers still feel they get the most bang for their buck out of TV’s and IPods, the perfect diversions for people who can’t afford to go out and have to sit in their devaluing homes…  Even computers are doing well as record Mac sales did not dent HPQ’s sales figures and US corporations have put off major IT purchases for almost a year now so look for a serious spike in spending IF the economy starts to turn up, even just a little (good for our MSFT too!).

Speaking of IPods, ITunes customers in China were unable to download songs this week and an activist group claimed Beijing was tryig to block access to a new Tibet-themes album but I think it was the same song that was banned in many Muslim countries:  Katy Perry’s "I Kissed a Girl."  Meanwhile, Chinese activists should be careful about who they complain to as two turned up missing just before the Olympics.

Europe is looking downright kissable at 9am with 1.5% gains across the board despite the UKs very flat GDP report.  Oil is back to $119 in pre-market trading and airlines and auto makers are leading the charge in Europe.  We noted the airline action in yesterday’s chat and I still like selling those RYAAY $25 puts for $2.50.  UK ad company WPP posted a 14% gain in 1st half profit and revenues sooooooooooooooo - Go Go Google!  (see how these things all connect…)

So everything is proceeding according to plan, it just would have been nice if we didn’t have to wait all week to get going but it’s a very long way to expiration (4 more weeks) and just because the markets are going our way today, doesn’t mean they won’t move against us tomorrow so let’s keep on our toes and remember to take a little off the table as we head up (see comments on rolling profits in last night’s LTP review).

Have a great weekend,

- Phil