Caterpillar’s woes leave it trailing a broader market rally
by Option Review - January 26th, 2009 2:00 pm
Today’s tickers: CAT, GE, WYE, COV, CCI & XLF
CAT – Caterpillar Inc. – A bellwether for the broader economy, Caterpillar brought more disappointing news to the table this morning, reporting a 32% slump in fourth quarter net income and lower than expected projections for 2009. CAT estimates earnings for 2009 at $2.50 per share on revenue of approximately $40billion which was way off Wall Street’s assessment of $4.35 per share on revenue of $45billion. The five-year surge in demand for CAT’s heavy construction equipment domestically as well as in emerging markets has come to a screeching halt, prompting the announcement of 20,000 job cuts among other cost-cutting measures. The implied reading of option volatility declined from 70 to 56% after earnings while the most popular destination for option investors was at the 30 line in February and March expirations where puts were bought. In the May contract more puts were sold than bought perhaps indicating that investors believe that shares should have recovered by that point in time.
GE – General Electric – Despite a 3.7% share price rally to $12.50 today, possibly attributable to affirmation from S&P that GE won’t lose its AAA-credit crown on account of last Friday’s fourth-quarter earnings results, option investors can’t seem to get enough downside protection. The February 10 strike is heavily-trafficked in Monday morning activity where more than half of the 63,000-strong volume was initiated by interested buyers at a volume-weighted average price of 37 cents. The share price would need to decline to $9.63 before buyers break even on the deal at this stage.
WYE – Wyeth – Pfizer confirmed last week’s deal broken by the WSJ, when it provided a sweetener to its quarterly earnings saying it would pay around $50 per share for Wyeth. The combined drug manufacturer would have 17 products generating in excess of $1 billion in annual revenues. Wyeth’s shares were slightly higher at $44.10 while once again its option activity was active with almost 30,000 lots in play within the first hour of trading. Since the deal involves a $22.5 billion consortium loan by Pfizer, there is possibly some risk that the deal isn’t struck until the signatures are dry on the paper and hence shares in Wyeth are not fully valuing the proposal. The February 45 strike was option traders target today as they bought around 8,000 lots at the prevailing 70 cent premium.…
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DiggAnalyst upgrade has investor spreading calls
by Option Review - January 23rd, 2009 2:23 pm
Today’s tickers: TSCO, GE, FXI, DRYS, COF, WYE & PFE
TSCO – Tractor Supply Co. – The largest retail farm and ranch store chain in the U.S. received a boost from Wedbush Morgan, who raised TSCO’s target share price from $33 to $36 after earnings for 2008 for the company were reported after hours yesterday. Our ‘hot by options volume’ market scanner picked up TSCO today due to heavy call volume. One investor initiated a call spread, purchasing 5,000 calls at the April 35.0 strike for 3.30 and selling 5,000 at the April 45.0 bringing in 65cents per contract, yielding a net price of 2.65. The trade highlights the benefit of spread trading to help mitigate changes in implied volatility. This investor stands to profit from this strategy if shares reach breakeven at $37.65, and will realize a maximum gain of 7.35 per contract if shares can blow through analyst’s expectations to $45 per share. The outright purchase of lower strike calls in this case at a 58% implied reading of volatility is susceptible to a declining uncertainty should shares rise. Our IB Options Calculator (available free for download at this link) can help understand exactly how implied volatility can impact theoretical option prices.
GE – General Electric – CEO Jeffrey Immelt attempted to put speculation about the tug-of-war between dispersing dividend payments vs. maintaining their AAA credit rating to rest today. Immelt announced that GE is committed to allocating a $1.24 dividend-per-share for the year, and stated that though 2009 will likely be “extremely difficult” for many sectors of the Fairfield, CT based behemoth, he is confident in their ability to continue to persevere despite overall market turmoil. Despite feeling the strain of the credit crisis that afflicts most financial institutions, GE continues to profit from other operations boasting a solid $48billion in cash on their balance sheet. Though shares of the giant have tumbled nearly 40% since September of ’08, it appears that cost-cutting and restructuring plans, coupled with their ability to continue to reward shareholders via dividend payments, may bolster investor confidence. Option patterns all week have been bearish while today the tone is less so. The most popular option involves the February 14 strike call where volume of 22,000 has traded where the prevailing range so far is 30 to 64 cents. Some traders placed call spreads including the 16 strike and so…
Sony’s loss prediction creates put demand as ADRs slip
by Option Review - January 22nd, 2009 1:29 pm
Today’s tickers: SNE, GE, AFL, ALL, SHW & PCA
SNE – Sony Corp. ADRs – As the recession gouges new depths in consumption the lower the stock market goes as any remaining confidence evaporates. As that happens, investors look to the safety of the Japanese yen as a safe haven, which puts this nation’s exports on hold. Shares in Sony took a thump today as the company announced that previously enacted cost cutting efforts hadn’t done enough to prevent what might turn out to be its first ever annual loss. Meanwhile the Bank of Japan hinted at deflation while the outlook from other consumer electronics-manufacturers warned of worse to come. Temporary jobs in Japan are to be slashed and the sad truth that demand for televisions is on the wane causes Sony to offer early retirement to some workers. Demand for put options allowing investors to sell shares at a fixed $20 ahead of expiration in February was evident as investors paid 1.70 premiums to acquire 3,000 lots. Shares in Sony shed 13% on today’s news to $19.57. Investors buying puts would break even at a share price beneath $18.30. Implied volatility on Sony’s options saw one of the largest gains among stocks today as our market scanners picked up a 16% jump to 69%, which compares to a historic share price volatility of 50%.
GE – General Electric – The GE story is building a head of steam with more investors raising questions over whether the conglomerate will eat its words and cut its dividend tomorrow. If that happens – and more importantly – even if it doesn’t, there is growing speculation over the company’s ability to retain a AAA credit rating. Of course that’s out of management’s hands and at the mercy of the agencies on Wall Street. This week there has been a storm brewing in the options market where investors have bought an astounding volume of bearish put options. Once again today GE is the leading company on our market scanner in terms of option activity where more than 230,000 option contracts have traded by 11am. The 1.7 put/call ratio confirms the bearish nature of today’s activity. Specifically there is a further build at the March 5.0 strike put where the 26 cent premium is the current price of the 26,500 options that have traded today. Some of today’s activity could be wrapped up in volatility…
Prediction of General Electric’s AAA at risk spurs put-buying frenzy
by Option Review - January 21st, 2009 1:26 pm
Today’s tickers: GE, USB, WMT, NTRS, BK & CVTX
GE – General Electric – UBS today sent a note to clients telling them that shares in General Electric were a ‘short-term sell.’ The likely excess of credit losses beyond existing company guidance along with reserves that are too low means that the company is at risk of maintaining its AAA credit rating. What that means for the stability and preservation of its dividend, the other half of the equation that CEO Immelt is struggling to juggle, we don’t know. However, an option trader was quick to jump at puts suggesting a bruising for shares in the world’s largest maker of power-turbines. This morning some 25,000 put options were scooped up at a 30 cent premium as investors pored over today’s worsening outlook. The trade was as large as the overall number of established option positions at the March 5.0 strike and would make money should shares be trading lower than $4.70 at expiration. However, along the route, the position would be increasingly profitable should its shares continue to slide and should implied volatility rise. Both events would positively impact put premiums in this case. Today, GE slipped 3.9% to $12.43.
USB – U.S. Bancorp. – The product of its fourth quarter earnings announcement this morning was to leave shares in the bank doing the opposite of its peer group. Declining net income was hampered by the market valuation of some of its assets, while provision for credit losses and an increase in charge-offs didn’t help. Shares are 20% lower at $12.29 while option traders wasted no time in saddling themselves up for the next victim of the financial meltdown. Our option market scanners honed in on heavy trading so far today where 100,000 contracts are in action. The big picture view is that investors are scooping up puts at strikes as low as 5.0 where few investors have so far dared to venture. Call spread activity appears geared towards credit spreads in which investors are selling lower strikes and buying same expiration higher strikes for an overall account credit. March expiration puts are the big story where we are watching volume tick higher by the minute, with more than 11,000 puts in demand where investors have paid a 40-50 cent premium to reserve rights to sell USB at the fixed $5.00 strike ahead of expiration. Implied option volatility at the…
General Electric butterfly predicts slump in share price
by Option Review - January 20th, 2009 1:45 pm
Today’s tickers: : GE, STT, NTRS, BAC & XLF
GE – General Electric – One option trader is looking for General Electric to practically lose half of its value by the time February’s option’s expiration comes about. With shares currently trading down 5.3% at $13.21 an investor appears to have placed a butterfly combination in which three neighboring strikes were traded. In this case the butterfly has a ‘body’ at the 7.5 strike price, which marks the central point of the trade was bought, which means that the trader bought put options at the surrounding strikes, known as the wings, at 5.0 and 10.0. The investor simultaneously sells twice as many puts at the 7.5 strike. This particular butterfly involved 14,000 contracts at each of the wings with 28,000 puts sold at the body for overall volume of 56,000 lots. The net cost of the trade is just 19 cents but its success requires that GE’s share price lands anywhere between $5.19 and $9.81 at expiration. The investor wins most should shares settle at $7.50 at expiration in which case the winnings are 2.31 per contract. A butterfly buyer often wants a share price to stand still at a specific point (the central strike price) but this is a particularly bearish trade since in order to achieve this its shares must first decline by 43%. Implied options volatility at GE is 15% higher today at 84% while traders had put 161,000 options to work before 11:15am.
STT – State Street Corp. – One of the world’s largest institutional money managers, disclosed dismal fourth-quarter profits, down 71% to $65 million from the previous year’s net income of $223 million. Predicting flat results for 2009, the Boston based company, hired by the government as a custodian to aid in the recovery of the markets, saw their share price dive more than 52% to approximately $17.64. With a share price decline like this right out of the gate it’s harder for option traders to leave their footprint since they too are reacting to a new catalyst. Most of today’s option volume has been on the call side but we’re just guessing here that many of those trade tickets will have the word’s ‘opening sale’ stamped on them. In the February contract, there was practically no existing open interest at any of the six option strikes between the 17.5 and 35 strike lines. Today…
Light relief for Marshall & Ilsley as investors sell puts
by Option Review - January 19th, 2009 1:39 pm
Today’s tickers: : MI, WFC, C, BAC, EL, TRA, CY & FXI
MI – Marshall & Ilsley – Shares of the financial service provider are declining, and news of their quarterly loss of $403.9million and dramatic slash in dividends payments from $0.32 to just one penny, only exacerbated share price erosion. Options of MI have been actively traded today, with overall volume of 30,680 contracts versus MI’s existing open interest of 71,973. It appears that one investor took the opportunity to close an already established put position when he sold 1,400 contracts at 5.20. The options were initially purchased on July 24, 2008, for 2.20 each when MI shares were trading at $15.02, aloft of today’s depressing price of just $7.50. Elsewhere, it appears that an investor sold 5,615 puts at 1.15 in the February contract at the 7.5 strike, indicating that he believes shares won’t dip below $6.35.
WFC – Wells Fargo – In the wake of the devastation of the largest banks, such as Citigroup and Bank of America, shares at Wells Fargo & Company seem to be following suit. Its share price has eroded this week by approximately 30%, as it fell from $24.80 to roughly $17.50 by early afternoon today, posting a new 52-week low on the way. While WFC has heavy options volume overall of 335,000 contracts, many investors seeing this ugly decline in its share price have sought large amounts of protection by buying heavily into puts at the April 10 strike. So far volume at the strike has reached 48,000 contracts. Bearish buyers are shelling out 1.65 per contract yielding a break-even at expiration of $8.35. The size of positions being taken today by investors far outweighs the existing number of open positions of 9,313 puts. Option implied volatility is 5% higher at 159% adding to the cost of options premium.
C – Citigroup Inc. – It’s options expiration day, which means lots of action for investors pricing the 4.0 strike in the January contract. Shares in Citi are so far reacting positively to the placement of the axe right though the heart of its divisions and are trading at $4.05. Just for kicks, we’re watching the straddle trading, which is our barometer of where traders expect to see shares settle later today. Currently the call and put premiums combined at 32 cents predict that shares will settle between $3.68 and $4.32…
Volatility lower at Citi and BoA – but it’s still not party-time
by Option Review - January 16th, 2009 1:52 pm
Today’s tickers: : C, BAC, EL, TRA, CY & FXI
C – Citigroup Inc. – It’s options expiration day, which means lots of action for investors pricing the 4.0 strike in the January contract. Shares in Citi are so far reacting positively to the placement of the axe right though the heart of its divisions and are trading at $4.05. Just for kicks, we’re watching the straddle trading, which is our barometer of where traders expect to see shares settle later today. Currently the call and put premiums combined at 32 cents predict that shares will settle between $3.68 and $4.32 today. Time value is eroding by the minute! In today’s trading of the February contract it appears that investors are buying 6.0 strike calls in exchange for 7.0 and 8.0 strikes. They also seem to be selling out of 3.0 and 4.0 strike puts. Don’t be confused by options sales today, which might be less driven by directional traders as it is by volatility sellers. Overall implied volatility is off 15% to 178% on the contracts ahead of the weekend. We also think we note some back spreading in the March calls between 6.0 and 9.0 strikes where investors seem to be taking a net credit from the sale of the lower strike and limiting risk with purchase at higher strikes.
BAC – Bank of America. – Bank of America Corp, having just received $20 billion in TARP funds from the U.S. government, instilled confidence in the North Carolina based BAC, and drove share price higher and option implied volatility drastically lower from 211% yesterday to 158% today. Investors priced the 10 strike call expiring in February yesterday at 1.36, but this morning a pessimistic option trader sold more than 10,000 contracts at just 85 cents after the first half hour of trading, undermining confidence in the nascent share price recovery. Thus, it appears as though the sense of confidence felt by the $20 billion injection was easily shaken in these highly uncertain times for the feeble banking industry. By late morning, the 10 strike calls expiring in February are trading lower still at 60 cents on hefty volume of 28,500 lots as BAC teeters just above yesterday’s weakest price at $7.52.
EL – Estee Lauder. – With brands recognized around the globe, Estee Lauder, manufacturer and marketer of quality skin care, makeup, fragrance, and hair care products,…
Savvy options bulls force Chesapeake higher with call spread
by Option Review - January 15th, 2009 4:13 pm
Today’s tickers: : CHK, EXPD, BAC, C, AAPL, CYPB & SQNM
CHK – Chesapeake Energy Corp. – Oil and natural gas exploration and production company, Chesapeake Energy Corporation, edged onto our market scanners this afternoon due to a surprising volume of call activity. It appears that one bullish investor used its share price weakness to buy 1700 contracts at the July 20 strike at a price of 1.70 while selling the same amount at the July 25 strike bringing in 0.81 per contract. Shares have since rallied and stand 0.5% higher on the day at $15.49 despite a continued slide in crude oil prices. This bullish call spread costs a net premium of 89 cents and so breaks even at that distance above the lower of the two strikes at 20.89, yielding a maximum profit of 4.11 per contract if CHK can climb from today’s price to $25.00 or above. With any luck for this investor, Chesapeake’s share price will heat up come July, as currently it has not been above $25 since early in November of 2008.
EXPD – Expeditors Intl. – Shares of global logistics provider, Expeditors Intl. may indeed be falling but one option trader seems to think he has a way of profiting from the current decline. At $28.19 and down 2.5% on the session, shares are still above the October low point at $24.05. Today an investor appears to have added a bullish twist to a sold strangle on the haulage company using options in the May contract. One suspects the investor hopes that the deluge of negative news may be out of the way and the stimulus package in action by the time these options expire. The investor seems to have sold puts below the recent low at the 20 strike and sold calls at the 35 strike 12,000 lots each. In addition the investor bought 8,000 calls at the 30 strike for a 3.44 premium. The trade is an interesting one and requires that the market doesn’t break lower – in the raw strangle the breakeven occurs at $17.25 given the total 2.75 proceeds from the sale of calls and puts. Should its shares recover, which is a real risk should the market ever get over its January shivers, the investor is exposed to a rally in stocks at the heart of distribution, so the call purchase here makes sense.
BAC –…
Financials take another hammering
by Option Review - January 14th, 2009 7:18 pm
Today’s tickers: : C, BAC, HBC, BG & PFG
C – Citigroup Inc. – Without a doubt Citi is the leading option’s venue for panicked equity investors today. Options trades are running at a frenzied pace with volume soaring upwards of 200K for Citigroup today amid continued erosion of Citi’s share price. In this unprecedented financial crisis, it appears that the old adage the bigger they are, the harder they fall, still applies as pieces of the former behemoth continue to fall away. Having shelled out $2.7billion, Morgan Stanley will now own 51% of the formerly Citi controlled Smith Barney broker unit, now Morgan Stanley Smith Barney, with the option to acquire the remaining 49% in five years time. Citigroup garnered a much needed $6.5billion of equity capital in return for relinquishing a huge portion of their wealth management business. Its shares continue to recoil as speculation mounts as to what a remolded version of the company will look like. Shares are down 15% to $5.00 while around 200,000 options contracts have crossed the tape by 11am. Around half of this has taken place in the January contract, where options expire in just two more sessions later this week. At-the-money put options at the 5.0 strike have seen most volume with 28,000 lots in action, the price of which has surged from 9 to 42 cents today as investors ponder where Citi’s price will be in just two days – never mind after a re-tune. At the February 4.0 strike investors traded 20,000 puts at the 4.0 strike at a similar 42 cent premium, where the delta or the chance of these puts landing in the money, currently stand at 25%.
BAC – Bank of America. – Investors are raising the valid question about BAC’s recent acquisition of Merrill and what benefit it will bring the company in light of Citi’s forced sale of its stake in Salomon Smith Barney. Overall option volume at Bank of America today is a lofty 125,000 contracts of which some 20,000 were traded in one series alone. That volume of puts was initiated by buyers who dominated activity at the January 10 strike where investors paid 44 cents for rights to sell shares at the strike price by Friday’s expiration. Investors would make money if BAC was trading below a share price of $9.56. Investors also sold 10 and 11 strike…
Put selling on Bank of America drags share price from its lows
by Option Review - January 13th, 2009 1:18 pm
Today’s tickers: BAC, AA, ATVI, GE, ISIL & HBC
BAC – Bank of America. – The ongoing decline in the price of shares at BoA is prompting option speculators to take the opposite side of the trade as they appear to be happy writing premium through put sales. Shares have rebounded since we noted put sales dominating this morning’s activity and are off just 3% now at $11.08 having touched $10.70 earlier. Today’s price action values the company at its lowest point since the November 21 low. However, options implied volatility at 105% is little changed on the day indicating no acceleration of fear. In the February contract we noted sales at both the 7.5 and 10 strikes. Puts at the latter strike where sold for premium of 1.09 indicating a naked seller would get dragged under water at share prices below $9.91 by expiration. Elsewhere there was some demand for calls at the 15 strike where investors paid 29 cents for buying rights.
AA – Alcoa Inc. – Fourth quarter earnings from aluminum producer Alcoa were anything but shining. Reporting a fourth quarter loss of $1.19billion in the past year, times certainly look bleak for the Pittsburgh based behemoth. Citing a laundry list of factors leading to their poor performance, it would seem that Alcoa is far from seeing the light at the end of the tunnel, with decreasing prices of metals and plunging demand for industrial materials, excess capacity seems inevitable. As demand from their major end-users such as automotive giants GM and Ford continue to decline, and Alcoa’s margins increasingly diminish, investors fear that this situation may continue to snowball. While investors knocked a further 5.3% off Alcoa’s market capitalization following last night’s earnings to $9.52, option traders seemed to increase their appetite for put options reserving selling rights at the 7.50 series where they paid a 41 cent premium for more than 7,000 contracts. Open positions there currently amount to 12,776 contracts. Implied volatility subsided by some 15% to stand at 89%.
ATVI – Activision Blizzard Inc. – News that the maker of Guitar Hero has scooped an exclusive deal with legendary rock ‘n roller, Bruce Springsteen hasn’t helped shares at Activision today, which are 0.5% weaker at $9.06. Springsteen will make his video-game debut when his new album is released to be coincided with a TrackPack that allows game-buyers to download a fresh song along…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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