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As possible split draws credibility, May calls draw volume in bond insurers

Today’s tickers: ABK, MBI, INTC, DELL, DNA, NAK

ABK, MBI – Early morning news reports suggest that bond insurers MBIA and Ambac may be becoming more disposed to the idea of splitting their municipal bond units from their toxic, CDO-exposed structured finance divisions . A plan to this effect was first floated early this week by activist shareholder William Ackman, who has been shorting bond insurers. Initial response to the plan from MBIA and Ambac was cool, as it was believed that splitting the companies would amount to little more than a concession of defeat, rewarding Ackman’s own bearish bets. With no firm plan for a bond-insurer bailout in place, however, market pragmatists are suggesting that a split is more or less inevitable. Earlier today, CNBC reported that officials at both bond insurers are beginning to tinker with the scenario of possible downgrades of the bond insurers by Moody’s S&P and Fitch, and what the loss of a triple-A rating would mean in terms of competition with higher-rated companies, such as the initiative launched by Warren Buffett. Bearing all this in mind, we were interested to see option traders in both insurers recalibrate bullish positions in the March and May contracts. With shares in Ambac trading 7.5% lower at $8.54 today, we observed heavy buying at the March 10 call strike, which may have represented closing purchases given the 24% discount in premiums, or could be traders looking to position ahead of an imminent ratings announcement. Calls bought at the May $10 strike, meanwhile, were indeed fresh positions, bought for $1.65.

In MBIA, meanwhile, a similar dynamic emerged. With shares down 5.8% to $11.20, the 46,000-plus options trading in the bond insurer made it one of the most active tickers on our platform, with March 12.50 calls trading nearly 10,000 times for $1.18 – down 25% from yesterday’s value owing to the decline in share price. New positions were entered in the May 11 calls for $2.38.

INTC – Earlier this week it emerged that chip giant Intel has been subpoenaed by the New York State Attorney General’s office in an antitrust probe similar to one underway with the European Commission, which charges Intel with using unfair market practices to muscle its rival AMD from the European market. The European probe escalated earlier this month with a raid on Intel’s German headquarters. Shares in Intel are down 3%, more than twice the decline on the broader Nasdaq index today, and we surmise that this latest expansion in its antitrust saga may be driving the heavy buying interest in Intel’s March 20 puts. These calls are being bought at around 93 cents apiece, while March calls at strikes of 20 and above are attracting two way traffic. Heavy call selling in the April contract can be observed at strikes 19 and 20, with traders possibly looking for a new test of those late January lows, when Intel lost 19% of its market value in the space of a single week.

DELL – Options volume in computer maker Dell has picked up mightily ahead of its earnings announcement next Thursday. But contrasting sharply with the setup before Hewlett-Packard’s laid its golden egg this week, the accumulated put activity in Dell shows traders taking an advance duck-and-cover stance. With shares down 1.3% to $19.02, we continue to observe heavy buying interest in March 19 puts at 65 cents apiece. Open interest at this strike has doubled in the space of this week, with the 65-cent asking price for the contract implying a break below Dell’s standing 52-week low of $18.87.

DNA – With an FDA decision imminent for Genentech’s breast cancer drug Avastin, traders not content to sit on their hands in anticipation have put some 32,000 options in play, trading 5 times as often to calls as to puts. Genentech shares are treading water .45% lower at $71.43, but a look at the elevated implied volatility reading – at nearly 34% it’s at more than a 25% premium above the recorded historic level of volatility – bears easy witness to the degree of pent-up anticipation in the market ahead of this ruling. Genentech shares have made a partial recovery since the week of December 5, when the company lost 13% of its value on a preliminary rejection of Avastin for the treatment of breast cancer. It’s since made up only about half of that loss, so the still-visible battle scars of December 5 may explain the relative dearth of put-buying activity we’re seeing today. Instead, much of the volume involves two-way traffic at the March 70 strike on tight spreads with buyers paying $4.00 and sellers paying $4.10 ahead of the announcement. Further out, we believe some players may be looking for volatile share price action in June via the 70/75 strangle. The $8.20 premium on this position today generates profit for the buyer with a break of $82.30 to the upside or below $61.80 to the downside.

NAK – Copper futures pulled back slightly today after yesterday’s test of two-year highs. With that in mind, we were interested to see option traders make a bullish summertime play on Northern Dynasty Minerals, the developer of the Pebble Project copper-gold-molybdenum mine. Option traders today bought heavily into August 12.50 calls at $1.90 apiece – driving option volume to nearly 12 times the normal level. The move follows a 24.5% spike in implied volatility to 56% early yesterday, a level that has abated only slightly today. Earlier this month the Mitsubishi Corporation disclosed that it had increased its stake in Northern Dynasty to 9.1%. Option traders hold about 3.6 call positions for every put in Northern Dynasty.


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