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Amazon Options in High Demand Following eBook Pricing Concession

Today’s tickers: AMZN, DELL, FXI, AET, XOM, LPX, CSCO, VCI & ITMN

AMZN – Amazon.com, Inc. – E-tailer, Amazon.com, Inc., attracted two-way trading traffic in its options today after the firm gave in to publisher, Macmillan’s, demands to increase the price of digital books. Amazon.com’s concession to Macmillan is fueling investor concerns that the largest internet retailer is relinquishing its pricing advantage. Shares of the online shopping destination slumped more than 8.65% during the trading session to an intraday low of $114.38 – the largest decline in Amazon’s shares in more than one year. Investors inundated Amazon with options trades today, exchanging more than 226,300 contracts on the stock by 2:50 pm (EDT). Option volume generated thus far in the session represents more than 45% of the total 493,697 lots of existing open interest on AMZN. Strong demand for options on the stock as well as a rise in investor uncertainty boosted option implied volatility on Amazon roughly 8.3% higher to 41.44% in afternoon trading. Option traders expecting shares to rebound quickly purchased 2,200 call options at the February $115 strike for an average premium of $5.67 apiece. The $120.67 breakeven price on the contracts suggests call buyers expecting to amass profits in the next few weeks, anticipate a more than 5% increase off the intraday low, by expiration day in February. Call buying and selling in roughly equal proportions was observed at the February $120 strike and at the February $125 strike. Two-way trading traffic of put options is also apparent in the February contract. Contrarian players sold nearly 8,000 puts at the February $115 strike to take in an average premium of $3.58 per contract. Put sellers at this strike keep the full premium received if AMZN’s shares trade above $115.00 through expiration day. The most bearish moves were made at the March $105 strike where 1,100 puts were picked up for an average premium of $2.81 each.

DELL – Dell, Inc. – Bullish investors initiated call spreads on the just-in-time manufacturer of personal computers this afternoon with Dell’s share price up 2.5% to $13.22 on the day. Option traders purchased more than 10,000 calls at the August $14 strike for an average premium of $1.17 apiece, spread against the sale of roughly 10,000 calls at the higher August $18 strike for an average premium of $0.20 each. The average net cost of the bullish trade amounts to $0.97 per contract. Investors enjoy maximum potential profits of $3.03 per contract if Dell’s share price surges 36% above the current price to $18.00 by expiration in August. Profits begin to amass for call-spreaders only if shares increase 13.25% to breach the breakeven price of $14.97 by expiration.

FXI – iShares FTSE/Xinhua China 25 Index Fund – Shares of the FXI exchange-traded fund, which invests in 25 of the largest and most liquid Chinese companies, rallied 2.25% to $39.22 today. The move higher in shares of the underlying stock perhaps motivated the investor responsible for transacting a bullish risk reversal in the May contract. It appears the trader sold 7,500 puts at the March $37 strike for a premium of $1.92 apiece in order to finance the purchase of 7,500 calls at the higher May $42 strike for an average premium of $1.53 each. The optimistic trader pockets a net credit of $0.39 per contract on the reversal, which he keeps if the FXI’s share price remains at or above $37.00 through expiration. Additional profits accumulate in the event that shares of the ETF increase 7% from the current price to surpass the effective breakeven price of $42.00 by expiration in May. We note that shares of the fund traded above $42.76 as recently as January 19, 2010.

AET – Aetna, Inc. – A large-volume protective put play in the April contract on health benefits company, Aetna, Inc., caught our eye in the first half of the trading session. Aetna’s shares are trading 1.50% lower to $29.50 today and perhaps partly inspired the bearish put spread transacted on the stock. It looks like one investor purchased 20,000 in-the-money puts at the April $30 strike for an average premium of $2.16 apiece, spread against the sale of 20,000 puts at the lower April $25 strike for about $0.55 each. The spread cost the trader a net $1.61 per contract, thus providing downside protection should shares decline beneath the effective breakeven price of $28.39 ahead of April expiration. We note that the size of the transaction suggests the investor responsible for the trade is likely utilizing the spread to insure the value of a long underlying stock position through expiration in three months.

XOM – Exxon Mobil Corp. – Shares of the largest company in the United States rallied more than 2.50% today to $66.14 after the Texas-based firm revealed a smaller-than-expected decline in fourth-quarter profits. XOM posted earnings of $1.27 per share in the fourth quarter, which exceeded average analyst estimates by about 8 pennies a share. Bullish options activity on Exxon Mobil in the January 2011 contract today seems to be a repeat performance of long-term optimistic trading we observed recently. A bull call spread was purchased by an investor positioning for a move up in XOM’s share price by expiration next January. The trader picked up 14,500 calls at the now in-the-money January 2011 $65 strike for a premium of $6.15 each, marked against the sale of 14,500 calls at the higher January 2011 $75 strike for approximately $2.35 apiece. The net cost of the spread amounts to $3.80 per contract. Maximum potential profits of $6.20 per contract accumulate for the trader if Exxon Mobil’s share price increases 13.40% over the current value to $75.00 by expiration day. Option implied volatility on the stock is down roughly 9% to 20.98% following earnings.

LPX – Louisiana-Pacific Corp. – It looks like a couple of different options trading strategies were employed on the manufacturer of building products today. A large short straddle enacted in earlier trading suggests one individual expects decreased volatility in the price of the underlying going forward, while plain-vanilla call buying indicates bullish sentiment by another investor. Louisiana-Pacific’s shares are currently up more than 2% to $7.26. All notable options trading activity on LPX took place at the January 2011 $7.5 strike. One investor sold 10,000 calls at the January 2011 $7.5 strike for a premium of $1.25 each in combination with the sale of 10,000 in-the-money put options at the same strike for an average premium of $1.60 apiece. The gross premium pocketed by the straddle-seller amounts to $2.85 per contract. The investor keeps the full premium if LPX’s shares settle at $7.50 by expiration next January. As always, short straddle players are exposed to potentially devastating losses outside of the effective breakeven points, throughout the life of the option contracts. In this case, the trader experiences losses if shares of the underlying rally above the upper breakeven price of $10.35, or if shares decline beneath the lower breakeven point at $4.65 in the next eleven months. Finally, traders looking for further upside movement in the price of the underlying stock purchased 2,000 calls at the January 2011 $7.5 strike for a premium of $1.40 per contract. Investors long the calls stand ready to accrue profits if shares of LPX increase above the breakeven price of $8.90 ahead of expiration. Option volume of 22,055 contracts generated during the session exceeds total existing open interest on the stock of 17,297 lots.

CSCO – Cisco Systems, Inc. – The manufacturer of switches and routers was upgraded to ‘buy’ from ‘hold’ at Signal Hill today and its share price improved 0.40% to $22.56. Perhaps still feeling sore from last week’s pullback in technology stocks, one investor initiated a put spread in the July contract today. The trader purchased 5,000 puts at the now in-the-money July $23 strike for a premium of $2.04 each, marked against the sale of 5,000 puts at the lower July $19 strike for $0.70 apiece. The net cost of the bearish spread amounts to $1.34 per contract. Therefore, downside protection provided by the transaction kicks in if Cisco’s shares fall back down through the breakeven price of $21.66 ahead of expiration in July.

VCI – Valassis Communications, Inc. – Shares of media and marketing services firm, Valassis Communications, are up 14% as of 10:10 am (EDT) to a new 52-week high of $23.90. VCI shares traded as high of $24.69 at the start of the session. Option traders exchanged nearly 3,000 call options at the February $25 strike, where it looks like the majority of the contracts were purchased for an average premium of $1.10 apiece. Option implied volatility is down 9.67% to 62.41% with 45 minutes elapsed thus far in the trading day.

ITMN – InterMune, Inc. – Biotechnology company, InterMune, Inc., attracted an influx of option players in early trading with shares of the firm up 2.80% to $16.05. Option implied volatility is soaring 114.91% higher to 116.02% as of 10:15 am (EDT). Investors are favoring call options on ITMN as traders exchanged more than 2.65 calls on the stock for each single put option in play. In the first hour of the trading day more than 24,500 contracts changed hands on InterMune. Notable call volume is building at the March $20 strike where 4,675 contracts are in play on existing open interest of 2,863 lots at that strike. We will certainly keep our eye on ITMN to see whether trading remains active throughout the session.


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  1. Phil

    Detailed analysis of AMED by Tuscadog:

    Posting Section 1 of 3:
    Feb 23rd may be ‘Judgment Day’ for the AMED short interest.
    This is a long posting based on a lot of research and high level interviews I’ve conducted and will exceed word max, so look at my ‘replies’ to my first post to see continuation of this post in (probably) 3 sections.
    I’m a substantial private (long term) investor in Amed and I don’t appreciate the way Amed has been ‘jerked around’ by the hedge funds with false rumors and shorting, hence my willingness to share my analysis with small investors.
    These are my opinions based on my own extensive research, so invest at your own risk.
    For background intelligence on Amed pay particular attention to the 7 articles by Daryl Davis in the ‘Financial Blogs’ section.

    UPDATED GUIDANCE WILL BE A NIGHTMARE FOR SHORTS:
    Amed will likely release 2009 EPS on Feb 23rd at around $4.90 to $5
    AND, more importantly, they’ll be giving guidance for 2010 based on the status quo on Medicare billing rates for 2010 (ie as already issued for 2010 by CMS).
    Based on the company’s enunciated growth rates and CMS’s announced approved rate increase for 2010 (which translates into a 1.8% net increase for 2010 after two flat pricing years) Amed will likely provide 2010 guidance in the $5.60 to $5.70 range. (As usual, actual results outcome will likely be higher, in the $5.70 to $5.90 range).

    The 15 analysts who cover AMED are waiting for Amed’s guidance update AND to see if there are any Health-Bill developments which could affect their fcts before getting aggressive with their upgrades. ( The Suntrust upgrade Monday to $70 target is using a pessimistic assumption of a revision to a retroactive 2.5% Medicare billing rate reduction for 2010, hence the (currently low) $4.95 eps target). Silly assumption really.
    Currently analysts eps forecasts for 2010 include varying degrees of Medicare price decreases, with e.g. BB&T at $5.22, UBS at $5.26, Jeffries is the low fct at $4.36 based on a 5% Medicare price cut assumption (which is silly and based on the always ignored Medpac recommendation to CMS).
    Based on the CMS approved (effective) 1.8% price billing rate increase for 2010, then Amed’s eps is likely to be around $5.70
    If the already approved CMS price increase were retroactively withdrawn (highly unlikely/unusual) and price remains neutral, ie no change, then the 2010 eps would likely be around $5.40
    Politically it now seems very unlikely that there will be any adjustment to the already approved CMS pricing before 2011. And, Massachusetts took care of the health-bill. So, $5.70 eps is the most probable outcome and likely Amed management guidance.
    Quoting Morgan Keegan’s article in Barrons last weekend, “Morgan Keegan says health-care-reform prospects are considerably bleaker”.

    The updated Amed guidance will have to be incorporated by the analysts and a slew of impressive upgrades will then ensue. This will be a disaster for the 53% huge short interest, since the price targets will move to around $85 in short order and $100 as 2011 becomes visible on the horizon, based on a 15x p/e. Institutions are accumulating this stock (based on increasingly bullish guidance from 14 of the 15 analysts), so covering this short interest will be a nightmare.
    It’s impossible to fct what will happen to the stock price during the likely short covering stampede.
    It will interesting to see a post from Cashindie on the analysis of the short interest and exit implications.
     

    AMED P/E
    Historically, until 2008 Amed carried an above industry average p/e since it is the industry leader and is growing sales and profits fastest. The bogus fraud stories floated by hedgies lowered the p/e. That position is likely to be reversed during the next few months with the accelerating performance and forthcoming guidance of Amed.
    With the industry average at 13.21 I would expect Amed to command 15x p/e given the outstanding track record of growth and projections for industry consolidation. Amed can grow eps at 15 to 20% indefinitely, given the fact that the 4 professional public companies still only control 10% market share.
    Amed is an amazing cash machine, likely to generate $250 million of free cash flow in 2010.
    It’s great to own shares in a co which doesn’t need much capex to produce good profits and who’s business in unrelated to the broad economy. The long term driver in this industry will be the aging baby boomers. I cannot identify and industry with better growth underpinnings.

    SOURCES OF AMED GROWTH
    With 170 branch start-ups in the pipeline and a (phenomenal) 18 month cash payback on the branch start up investments, one can see why Amed will remain a growth engine in this highly fragmented industry.
    Acquisition paybacks are running at just over 3 years payback. Economies of scale are becoming significant. Eg Amed has been able to eliminate $30 million of cost following the $300 mm acquisition of TLC.

    There are 5 primary sources of ongoing rapid revenue growth.
    1. Organic. I.e. sss growth as more referrals are gained each year by each branch, based on superior performance metrics and growing reputation. Increased revenue per patient (aging demographics / # of treatments per client, new revenue programs like ’Balance for Life’ etc). Pricing, 1.8% increase for 2010 but unlikely to exceed inflation in future.
    2. New hub and branch start-ups, branching out from an established hub structure.
    3. Acquisitions. Amed slowed this in 2009, pending more clarity re healthcare legislation. Amed is now restoring rapid acquisition growth plans and has staffed up with talented officers accordingly. The main sellers are hospitals, which don’t know how to manage this peripheral hhc business. Acquisitions, like the recent Hackensack deal create new hubs which facilitate rapid organic branch growth. Referrals start flowing in from other hospitals when the conflict of interest of hospital owned hhc agency is removed.

    4. The health insurers, like Humana who are now awarding big contracts to Amed in an effort to keep the insured out of expensive hospitals. A common sense solution.

    5. Increased focus on rapidly growing the still small hospice division, which is very synergistic with the hhc business. Most hhc customers eventually require end of life institutional care and the referral is by the same doctor.

    Profit growth is mainly driven by this revenue growth model. Pricing has remained relatively flat with CMS approved increases of zero in 2008 and 2009 then 1.8% (effective) increase for 2010. Negligible inflation has kept costs relatively flat. Profit margins have been improving due to growing economies of scale. Amed is superb at managing the efficiency of case loads and maximizing visits and efficacy per nurse through computer systems support.
    The regional bank consolidation model is a good benchmark for the kind of synergies being achieved at Amed.
     

    WHY THE SHORT INTEREST:
    Initially there were two arguments:
    The floatation of bogus rumors of Medicare fraud – now dispelled.
    The concerns re: the proposed Healthcare reform and impact on Medicare pricing.
    The short interest is (now) primarily a gamble that a new healthcare bill damaging hhc will somehow emerge this year and will reduce billing rates and revenues at Amed.
    The false Medicare fraud accusations which were floated late year by shorts have been removed by the Marwood report and the intensive due diligence by the incoming COO and officer hires. Amed routinely handles 175 audits per year.
    If I were a hedge fund, I wouldn’t want to gamble my investors money on Congress implementing a healthcare bill before the Nov elections?
    I look fwd to further intelligence from ‘Cashindie’ on the short book analysis.

    HEALTHCARE BILL CHANCES:

    Still great uncertainty about future of healthcare bill. But, Quoting Peggy Noonan from Saturdays WSJ: “The battle over the President’s health-care plan is over, and plan will not be imposed on the country. Waxing lyrical over the virtues of the bill was a rhetorical way to obscure the fact that it is dead. To say I’m licked and it’s done would have been damagingly memorable. Instead he blithely vowed to move forward, and moved on. The bill will now get lost in the mists and disappear. It is a collapsed soufflé in an unused kitchen in back of an empty house. Now and then the President will speak of it to rouse his base and remind them of his efforts.”

    Investors must decide for themselves. But, industry lobbying, spearheaded by Amed, was successful in persuading the Senate to pass a relatively benign version of the bill which would not have any rate reductions (rebasing) until 2014. The Senate proposed a 3.5% billing reduction on $30Billion spending in 2014, partly since this would produce more savings than on a $19Billion 2010 spending now – without damaging the viability of the industry. (Remember 35% of the industry is only operating at B/E or a loss currently).
    Since there are more Congressmen to lobby, the hhc industry has focused it’s lobbying efforts on the Senate so far. But, they plan to ramp up the lobbying of Congress. The message is pretty simple – Medicare can save big money by keeping the burgeoning population of unhealthy old folks out of expensive hospitals though expanded emphasis on much cheaper home care. Hcc should be supported and encouraged, not attacked (especially when studies show that 35% of the industry is currently unprofitable).

    Industry management believe that the normal course of Medicare rate-setting, will have a more pronounced effect on the home health-care providers than any new legislation.
    SUPPORT BY THE ANALYST COMMUNITY:
    In depth study by 16 analysts is a very reassuring underpinning for Amed shareholders. The fact that 12 of 16 analysts turned up for a dinner in New York, with the whole Amed management team, after the recent Jeffries presentation is a strong show of support for Amed’s prospects.

    Pressure will mount on several of these analysts when Amed provides the updated guidance on Feb 23rd.
    While it’s nice to under promise and over-deliver, some institutional clients will be miffed that they left a lot of money on the table by not upping their ownership of Amed before the inevitable price run-up.
    There will be a stampede by analysts to provide more pragmatic updates of eps guidance and share price targets. Their problem is that the hedge fund shorts are also their clients, and their brokerages are making serious money lending them Amed stock (as are the confident long term institutional owners/lenders who are making 12% a year from lending out the stock).
    That’s why no one is really interested in actually holding stock certificates.
    What an ethical world we live in.
     

    CONCLUSION:
    I predict that after the adjustment to the new target price of $85, Amed will appreciate each year by 15% to 20% in line with the sales and earnings growth as Amed ‘rolls up’ this industry. There will be fits and starts based on peaks and troughs in acquisition activities.
    An unusual recession proof industry.

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