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Archer-Daniels Midland, Dow options show auspicious upside plays

Today’s tickers: ADM, DOW, BEAS, EK, SAKS, GE, PLCE, BIDU

BEAS – Today’s unsolicited move by ever-acquisitive Oracle to buy BEA Systems for $17 per share, sent BEA stocks skyrocketing to $18.09 – well past the initial offer, and igniting rumors that a competing bid may be in the offing. With options moving at 20 times the average volume, some traders aren’t waiting for a bidding war to erupt – they’re taking profit given the spectacular rise in call-side premiums today. We believe this is what can be observed in the December 15 calls, which traded more than 11,000 times this morning, selling primarily to the bid at prices around $3.10. This may have been the closing of positions opened for $0.65 in late July, when BEA Systems shares were trading 27% lower at around $13.00. Looks like these early call buyers – not to mention shareholder Carl Icahn – cashed in handsomely in the space of two months.

Flashy call buying, meanwhile, was seen in the October and November contracts at the 17.50 level, implying a sustained rise past $18.50 in November.

ADM – Options in agricultural commodities giant Archer Daniels Midland (ADM) are trading at 8 and a half times the average frequency this afternoon on chatter this afternoon, as shares gained 1% this afternoon to stand at $35.27. ADM has been the subject of past takeover chatter, but these rumors have since gone scale. The 75,000 lots trading match more than 21% of ADM’s total open interest, and most of this was tied up in the sale of calls at the out-of-the-money November 40 strike against the purchase of lots in the January 40 strike. The trade suggests an investor is paying a net premium of $0.50 in hopes of a 17% gain for ADM shares after November’s expiry but in time for the January contract. A further 2,200 lots traded in the March 45 calls.

DOW – Options in Dow Chemical are trading at 9 times the average rate today, with shares up 3.7% to $46.43. We’re tracking the development of what looks like chatter-driven activity in Dow options, where implied volatility has also surged some 30%. Traders are piling into calls at the 50.0 strike in the October, November and December contracts, implying an upside move to two-year highs for Dow shares.

EK –News that Eastman Kodak is planning to discontinue its official Olympic sponsorship after the Beijing games appears to be the catalyst behind a five-fold increase in option volume. Shares gained 5% to stand at $28.42, with more than twice as many calls in play as puts. Traders appear certain of a return to the $30 level for Eastman Kodak shares, where last they stood in June. Today’s fresh buying in the November 30 calls is occurring at a level three times the prior open interest. A real divergence in implied versus historical volatility in Eastman Kodak options began in late September, and the spread has widened steadily since that time. Today’s implied volatility reading is just above 45%, compared to 33% historic volatility.

SAKS - Yesterday’s reported 7.7% rise in September same-store sales for luxury retailer Saks (SAKS) elicited an increase in option volume to 4.5 times the average today. Shares are trading 3% higher at $18.00, where it appears that traders are regaining confidence in the luxury retailer’s prospects for the near-term, by buying front-month, at-the-money calls at the 17.50 mark and closing out positions in the 17.50 puts. Open interest in the October 17.50 puts had tripled over the past week as investors may have sought defensive protection against a potentially wobbly sales number.

PLCE – Kiddie clothing retailer Children’s Place, whose shares slid 15% earlier this week on a cut in profit guidance, recouped 3% this morning to $23.56 on reports that the company may be up for sale. Option volume accelerated to 3 times the daily average, with contracts equal to slightly less than a fifth of its total open interest in play. While the number of calls in action triples that of the puts, it looks like option traders are taking advantage of the quick snap back in share prices and higher call-side premiums to unload existing October 25 calls, washing their hands of immediate upside in the company. These sold heavily to the bid at around $0.60 in early trading. Call-side volume elsewhere figures heavily in the December 20 calls.

GE - GE’s before-the-bell Q3 earnings, revealing a shortfall in profits at its infrastructure unit, left investors cold this morning. Shares stumbled 2% decline in shares to $40.69, and a look at the 79,000 options in play indicates that GE is facing a tough claw staying above the $40 line for the rest of the month. This morning’s report elicited a dash among option traders to buy October 40 puts, where more than 15% of this morning’s volume is settled. Elsewhere it appears that spread trades are in play in the December contract, with traders selling the 42.50 call at $0.75 and buying the closer-to-the-money 40.00 call with its higher delta. GE shares had shown a tenacious if slow climb from a $33.90 low in March, peaking for the year to date earlier this month at $42.15.

BIDU – Yesterday’s market bête noire, high-market Chinese search engine led a dramatic reversal in the otherwise robust tech sector, after a leading investment bank trimmed its Q3 revenue target for the company. Baidu is due to report earnings in two weeks’ time. Today its shares are holding on to a slim .79% gain at $311.10 with more than 97,000 options in play – that’s equal to about a quarter of its open interest. Despite warnings of a bubble-like setup for tech-side dazzlers such as Baidu, we’re continuing to see heavy buying interest in calls at strikes as high as $330. Upside positioning is occurring at strikes as high as $340 in the front month. Implied volatility continues its massive spike – two days ago the reading stood at 75%. It’s now at 92% and showing little sign of abating.

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  1. Brilliant, thank you…. I’m really messed up right now, so I can’t comment coherently, but I love your concise format.

    PSW is coming together, I love it. Love the future. Keep it up, will be an active reader.

  2. I’ll throw in another vote of “hell yeah” on the new content from Andrew. My $99/mo is starting to look like a bargain. Don’t tell Phil.

    Go to bed DM.

  3. Where did this Andrew guy come from. Brilliant!!!!

  4. Andrew is the Senior Market Analyst at IAB. He won’t be commenting on the site but he has been gracious enough to share his daily market notes with us. I have worked with him for a while and really admire his ability to summarize market movers like this.

  5. Oh, to be fair, like any good Senior Analyst, he has a Junior analyst working with him and that’s Rebecca Darst, who should get credit too, we need to fix up the format a bit to give them a logo link to IAB and give Rebecca some credit!

  6. Thanks Rebecca! We all know Jr’s work harder anyway, kudos.