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Thursday, March 28, 2024

Bond insurers see whorling implied volatility on bailout fears

Today’s tickers: MBIA, ABK, QCOM, HGSI, SHPGY, F, YHOO, FO, XLF, MSFT, EBAY, ESRX

MBIA, ABK – Shares in the nation’s two largest municipal bond insurers, MBIA and Ambac, retreated sharply in afternoon trading after New York’s insurance superintendent suggested in an emailed statement that any sort of formalized bailout of the insurers would take time. Yesterday’s meeting between New York insurance regulators and a number of major banks regarding a possible bailout was a contributing factor to yesterday’s bumper rally in financials, sending credit default swaps on MBIA and Ambac sharply lower. Today’s uncertainty over the timeline and circumstances of a rescue plan has led to a general recalibration of the risk assessment in MBIA and Ambac shares. Implied volatility in both insurers is sharply higher, up 14.5% to 230% in MBIA and up 12.5% to 230% in Ambac. MBIA option activity showed traders rush to buy puts at the 10 and 12.50 strikes, selling calls at the March 15 line for $3.20 in what can safely be described as defensive posturing. MBIA shares are currently 12.7% lower at $14.49. The same held true in Ambac, where puts at the February 7.50 line sold heavily at twice the level of open interest, while puts at the 10 and 12.50 strikes were bought. Heavy traffic in calls at the 10, 12.50, 15 and 17 strikes suggest volatility positioning here as well, as Ambac shares trade 11.6% lower at $12.10.

QCOM – Shares in Qualcomm, the world’s second-largest maker of semiconductor components for cell phone, surged 9.5% to $40.03 this afternoon after the company boosted guidance for 2008 on strong global demand for its chips. With nearly 144,000 options trading this afternoon, four times as many calls are trading as puts, but directional bias shows many looking for muted upside in Qualcomm shares. Calls at the February 40 strike were most actively traded today as premiums were nearly 300% fatter, attracting buyers and sellers, while calls at the next higher strike, the 42.50 line, were mostly sold. In the March contract, we observed fresh shorting in March 40 calls on volume of nearly 9,000 lots, with traders pocketing the $2.25 premium in the expectation that the break past $40 won’t be sustained into March.

HGSI – Shares in Human Genome Sciences are basking in a 10% gain this afternoon at $6.19, having plummeted earlier after the company reported serious side effects in connection with its hepatitis drug, Albuferon. Options are trading at nearly 7 times the normal volume today, with most of this activity seated in call spreads in the April contract. Calls at the 7.50 strike were bought freshly at around $0.55 against the sale of calls at the 10.0 strike for $0.15, a strategy implying anticipated upside into the spring.

SHPGY –Shire PLC ADR – Our market scanners captured an unusual level of activity in out-of-the-money calls of Shire, the maker of ADHD drug Adderall and a series of gastrointestinal and renal drugs. Shares are trading 3% higher today $60.34 with options moving at 15 times the normal level – the equivalent of 80 percent of all its open option positions – on no apparent news catalyst. This volume was roundly centered in April calls, with what appeared to be call spread activity at the 65 and 70 strikes. Today’s volume represents the highest level of trading activity in Shire calls in six months – the difference here is the massive spike higher in implied volatility, which at 51% shows option premiums reflecting 18% more price risk in Shire ADR’s over the next month than they have shown over the past year. With no apparent drug approval milestones to report, we’re curious as to what the event risk might be.

F – This morning’s earnings release from Ford showed the automaker successfully paring losses but offered a demand outlook for 2008 that was grim enough to require job buyouts and adjusted production schedules. Shares were trading 2.2% lower as of 2pm at $6.17, while on the options front, some 30,000 options were in play according to our data, 4 times as often to calls as to puts. Most of this was captured not in the front-month February contract, but in June at-the-money $6 calls, which sold off heavily at around $0.85. Ahead of earnings, we noted that yesterday’s active volume appeared to favor a more bullish upshot for Ford shares, and the sharply elevated implied volatility reading seemed to divine a big move. Heavy buying was observed in calls at the February $6 and $10 strikes – that latter, out-of-the-money strike was bought heavily late in the session for 5 cents a pop, reflecting a scant probability that Ford shares might test that level on back of earnings or a broader equity bounce. In this case the speculative trader might have been looking for sentiment to tip just enough to the upside that that the nickel premium would appreciate, generating a profit upon the closing of the trade even without a break of that ambitious strike price. So far, such a move has not been forthcoming.

YHOO – It’s been a busy day in Yahoo!’s PR pipeline. Earlier today Reuters reported that the web portal is in preliminary talks with major record companies to make MP3 files available to site users via a user-pay or ad-supported service. Earlier this week reports surfaced that the company may be on the verge of cutting up to 5% of its workforce. But in our experience, there’s nothing quite like juicy takeover conjecture to aerobicize Yahoo! shares – and its call volume . Where the market often seems to shrug off all manner of bells-and-whistles product previews and restructuring talk, speculation suggesting that a buyout is imminent often generates bullish interest. Bearing past history in mind, we wonder if today’s 5.6% gain for Yahoo! to $21.13 might have something to do with today’s New York Post snippet suggesting that private-equity firms and media conglomerates detect blood in the water now that Yahoo! is down 11% for the year and 39% off its 52-week high – and that the dogged dotcom might not be able to fend off a hostile takeover given its persistently low share price. Yahoo! implied volatility has been sharply elevated for the entire year, but the gap between implied and historic has narrowed somewhat of late, and the 62% current reading shows about 14% more price risk for Yahoo! shares over the next month than they have shown historically. Given this closing of the gap, traders appear content to sell front-month volatility in alls at strikes 20, 22.50 and 25 and puts at the 17.50 and 20 strikes. Elsewhere in the April contract we saw what appeared to be the closing of positions in 25.00 puts, which traded for $4.90. If indeed this was the tying off of positions opened in mid-December at $2.32, the trader would have more than doubled his or her money as early-2008 teething pains throbbed in Yahoo! shares.

FO – Fortune Brands, the diversified consumer goods company whose motley brand portfolio includes Jim Beam bourbon and Titleist golf gear, is due to report earnings tomorrow. Shares are showing a slight, .77% decline to $68.63 while options volume has surged to 14 times the average volume. Despite the historic high implied volatility reading of 29% – a climb from below 20% levels that began around New Year – traders are paying little mind to volatility plays in the front month in advance of its quarterly numbers. Instead, we saw calls at the out-of-the-money 95 strike in the January ’09 contract trade to the middle of the market at $0.50 apiece. The fifty-cent premium reflects the market’s current estimation of less than 10% probability that Fortune shares can vault $6 past the standing 52-week high, but a buyer in this case might feel it worth the risk, with time on his side. Indeed, Fortune’s fortunes might look very different indeed – if, for example, the company’s bid for Sweden’s Vin & Sprit AB, maker of Absolut Vodka, is accepted. Fortune Brands is competing against the likes of LVMH Moet Hennessy, Pernod Ricard SA, Bacardi and others.

XLF – This morning’s news of tawdry trading to the tune of $7 billion at French bank Societe Generale provided plenty of fodder for the financial press today, though any newly-hatched worries about risk management vulnerabilities appeared to have little impact on major financial issues. The underlying share price of the XLF, flat-to-higher at $28 this afternoon, seems instead to be processing a multitude of volatility-feeding factors – Fed rate action, possible bond-insurer bailouts, M&A speculation – that have left traders with little directional confidence in the underlying share price and resorting to bald volatility plays instead. More than 420,000 options had traded in the XLF as of our 2pm update, with calls outtrading puts by a factor of 1.4. Earlier today we thought we observed traders positioning long the 27 straddle and 27/28 strangle, buying calls and puts in anticipation of sees or saws away from current strike levels. Long 27 call positions may also be involved in call spread activity with the sale of the 29 call.

MSFT – Microsoft – With earnings due out after the bell, Microsoft shares are 2.7% higher at $32.79, with 288,000-plus lots trading this afternoon, 3 times as often to calls as to puts. Early volume appeared mostly in February 35 calls, which were actively sold, possibly representing covered call writing in connection with underlying stock positions. The price of the at-the-money 32.50 straddle shows front-month premiums reflecting a 9% up-or-down move following earnings, while implied volatility on all Microsoft options is elevated at 42% – reflecting about 40% more price risk for Microsoft shares in the next month than they have shown historically.

EBAY – Ebay – Solid earnings but cautious guidance for 2008, coupled with uncertainty over the passing-of-the-reins of longtime CEO Meg Whitman materialized in a 6% decline for shares to $27.18. With 65,000 options trading in the first market hour, we saw puts outmove calls by slim margin. This was characterized by fresh buying in February 25 puts and selling in 22.50 puts, possibly indicating bearish put spread activity. Implied vol on eBay has come sharply off, down 26.7% to 44.4% this morning.

ESRX – Express Scripts – A 1.4% decline for shares to $63.41 had options moving at 3.5 times the normal level today, with possible bear call spread activity involving the sale of February 65 calls for around $2.10 and purchase of calls at the 70 strike for $0.70. This is a credit spread position initiated in the expectation of declines in Express Scripts shares below the lower strike that would make the $1.40-point premium per option contract an attractive maximum profit.

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