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Friday, March 31, 2023


Call volume spikes in Schering-Plough, Merck despite share price slide

Today’s tickers: SGP, MRK, VIX, XLF, CSCO, EL, FDG, JNY, MMC, EMC, RAIL

SGP, MRK – FDA officials announced today that a new review of Merck and Schering-Plough’s cholesterol drugs Vytorin and Zetia could take as long as six months, as the agency decides whether to take further action after a study earlier this month showed the patented drugs were no more effective in reducing arterial plaque buildup than a drug already on the market which is also available in generic form. Earlier in the afternoon, Merck and Schering-Plough issued a joint statement vociferously defending the drug’s efficacy. According to a Bloomberg story this afternoon, fallout from the study has resulted in a 12% drop in Vytorin prescriptions and a 15% dropoff for prescriptions of Zetia.

It wasn’t surprising to see these factors conspire to send implied volatility in Merck and Schering-Plough higher as shares in both drugmakers slid lower, Merck closed 3.6% lower at $47.75 while Schering-Plough closed 5.7% lower at $19.02. Implied volatility in Merck options soared 17% this afternoon to read 44.4%, this against a historic reading of 37.8%, while in Schering-Plough the current 58.8% implied volatility reading shows options pricing in about 15% more price risk over the next month than its shares have demonstrated over the past year. The faceoff over Vytorin appears to have whetted traders’ appetites for calls in both drugmakers, with Merck call volume ringing in at more than triple the average level. In this case, traders put at-the-money February calls at the 47.50 strike in play at more than 6 times the open interest, trading to buyers and sellers, along with heavy traffic in the 50 and 52.50 calls. Pronounced liquidity in the $47.50 puts suggests that volatility plays were also in action this afternoon. With shares in Schering-Plough at $18.13, we observed 3.5 times as many calls trading as puts, with February 20 calls bought and sold on a volume more than twice the open interest. March trading action had a decidedly bullish tinge for Schering-Plough, with buying interest in calls at the 17.50 and 20 strikes.

VIX – Early market gains on back of banner blue-chip earnings quickly melted away on reports that Goldman Sachs may be looking to hack 5% of its workforce. With the Dow closing 160 points lower this afternoon, the Volatility Index made a new test of the 30 level, surging 4.6% to read 29.08. With 86,000 options trading, nearly half today’s volume was in February calls at the 27.50 and 30 strikes. The higher call-side premiums here imply buying pressure at these volatility-bullish strikes. Current premiums show a 1-in-2 chance of the VIX closing above 30 by mid-February.

XLF –Financial Select Sector SPDR – For the past several sessions we’ve riffed on the apparent lack of directional confidence in the broader financial space – at least as evidenced by share price action in the sector ETF. as the underlying share price closed 2.8% lower today at $27.21. Ambiguity over the role of banks and brokerages in a broader bailout of bond insurers, fresh conjecture about the extent to which this week’s Fed rate cut may have been spurred by massive unwinding of rogue trade positions by SocGen, possible job cuts at Goldman Sachs, and unresolved takeover chatter throughout the sector are all contributing to the crack and fuzz of market static. Action in the XLF’s February contract continued to bear that out today, with early market action showing nearly 320,000 options trading. As has been the case throughout the week, the tendency among traders has been to sell calls at strikes of 27, 28, 29, and 30. Heavy selling in February puts at strikes of 27 and 28 tells us that the general inclination among traders is to sell front-month volatility rather than stake bets on price direction for the financials. Call buying interest did, however, appear in the March contract at the 29 strike, which traded 19,000 times for about $1.18. A buyer of this strike does so in the expectation that the XLF can break above $30.18 by March expiration – current premiums reflect a less than 50/50 chance of that happening.

CSCO –Cisco announced earlier today that it has bought a stake in ip.access, the British based maker of so-called picocells and femtocells, mobile base stations which enhance Internet access for mobile phones. Ericsson and Nokia and Google have all been early movers in investing strategically in femtocell makers. On the options front, Cisco ranked among the top 10 most active tickers on our platform on Friday. Shares closed 3.6% lower at $24.21, less than $2 above the 52-week low set two days ago, when implied and historic volatility both set new highs. Implied volatility has come off a bit since then and now at 43.5% shows option premiums reflecting about 10% less price risk than Cisco shares have shown over the past year. Early action in the February contract appeared skewed to call selling at the 22.50, 27.50 and 30 strikes, while calls at the 25 mark were mostly bought – not a lot of confidence here in a significant move above current price levels before February expiration. Still, overall open interest favors the bullish calls by a factor of 1.5 ahead of Cisco’s earnings announcement, which is scheduled for February 6.

EL – Option volume in The Estee Lauder Companies advanced to nearly 4 times the normal level as shares closed .41% higher at $39.24. The company, which markets the eponymous Estee Lauder brand of department-store cosmetics, also owns the Clinique, Prescriptives, Origins and Aveda cosmetic brands. Yesterday it announced a deal with biotech Allergan, the maker of breast implants and injectable wrinkle filler Botox, which will market a new line of skin-care products under the Clinique brand name exclusively in doctors’ offices. According to Bloomberg news, this is the first time ever that Clinique products will be offered outside retail stores, and is designed to capture growing demand for non-invasive cosmetic medical procedures. Implied volatility in Estee Lauder options remains elevated at 41.1%, above the 35.5% historic reading, in advance of its earnings report next Wednesday. Puts are trading at their highest volume in at least a year, with traders selling at-the-money puts at the February 40 strike in excess of open interest, pocketing the $1.80 premium in anticipation of Estee Lauder share prices remaining at or above the $40 level by February expiration. Calls at the 45 strike were also heavily trafficked, with the 30-cent premium on this strike reflecting just a 14% market probability of any upside exceeding $45.00. A buyer of this call might still find the position attractive if post-earnings upside is sufficient to bump the price of that 45 call higher, allowing him or her to close the position at a profit.

FDG – Unusual action was seen today in Fording Canadian Coal Trust, one of Canada’s largest royalty trusts, as evidenced by a sudden 16.8% spike in implied volatility to 47.4%. Shares set a new 52-week high today at $43.70, up 10.3% from Thursday’s close. In option trading, the 9,700 contracts in play represented 8 times the normal level of activity at this ticker, with some traders buying puts at the February 40 strike, possibly anticipating some near term retracement after today’s spike higher, while elsewhere, calls at the February 40 and March 40 and 45 strikes were heavily trafficked as these premiums gained some 200% in value overnight.

JNY –Options in Jones Apparel Group made an illustrious return to the “Hot by Options Volume” scanner, trading at 8 times the normal level as shares closed flat at $15.50. The company’s portfolio of fashion labels includes the Jones New York, Nine West, Anne Klein, and Easy Spirit brands, Call volume is already at its highest level since early December, as the total volume showed some 68% of its open interest in play today – a strong hint that much of the positioning here was fresh. Traders showed an inclination to sell puts at the February 12.50 line and load up on fresh longs at the March 15 call strike for $1.60. The 66.4% implied volatility reading shows current premiums reflecting about 16% more price risk for JNY shares than they have demonstrated over the past year, but a reluctance among traders to stray from at-the-money call strikes shows some ambivalence over the potential move – Jones Apparel shares have traded as high as $34.47 over the past year.

MMC – One week after news of a possible takeover bid from peer insurance broker Willis Group Holdings hit the airwaves, options in Marsh & McLennan are trading at nearly 3 times the normal level today. Shares closed 1.2% lower at $27.00, and with the equivalent of 17% of its open interest trading actively, traders sought to buy February calls at the 25 and 30 strikes. The latter strike was bought on volume more than twice the open interest. Implied volatility has receded sharply over the past week and now stands at 39.5%, well below the 46.1% historic reading.

EMC – Shares in EMC Corp, the Massachusetts-based maker of information management and storage software such as Symmetrix, gained .79% this afternoon to close at $16.68. The company is due to report earnings next Tuesday, capping off a 52-week period that has seen its shares advance 20%, outperforming even the S&P information technology index. With nearly 70,000 options trading this afternoon, traders appeared keen to sell puts at the 16 and 17 strikes, while calls at the 17 strike were bought heavily. This trend extended to fresh positions in the March contract, with selling in excess of open interest in the 16 and 17 puts, and fresh buying in March calls at the 18 strike.

RAIL – A 21% surge in option implied volatility in FreightCar America ranked the company among the day’s top volatility gainers. This occurred against the backdrop of a 14% gain for shares to $35.63. The company, which specializes in the manufacture of aluminum railroad cars primarily for the coal industry, is perhaps best known as the maker of Burlington Northern Sante Fe’s centerbeam flat car, the FleXibeam. Earlier this week it announced a joint venture with Titagarh Wagons Ltd to develop freight cars for the Indian market. The implied volatility reading of 56.8% is the highest reading we have on record for the company, and interests us as it comes after the disclosure of the Indian joint venture but well in advance of its earnings report on February 6. What’s more, call volume is at its highest in at least half a year, and while the 4,000 options actively trading this afternoon are modest in absolute terms, it matches up to more than half of FreightCar America’s total option positions. Traders appeared keen to buy February calls at strikes as high as 40, while in the March contract, calls at the 30 and 35 strikes sold heavily, against the purchase of calls at the 40 strike.


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