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Friday, December 1, 2023

Ambac alleyoop sparks another rally…


LNG – Shares in Cheniere Energy, the developer of onshore liquefied natural gas (LNG) terminals, gained 7.5% to close at $28.87 today. Earlier today the company said it was exploring a possible sale of its 92% owned Sabine Pass terminal in Louisiana to “enhance value for its shareholders.” Not surprisingly, option volume powered to 27 times the normal level as calls traded on their heaviest volume in our records today. Implied volatility also rose in step to reflect about 34% more price risk to Cheniere shares than they have shown historically. Option traders are eyeballing the September contract for some resolution to this possible terminal divestment, with what may be long call spread positions between strikes 35 and 40. The trader in this instance would position for upside by buying the September 35 calls for $2.10 while controlling trade costs via the sale of 40 calls at $1.00. The remaining debit means the trade generates profit for the buyer once Cheniere breaks past $36.10, but the sale of the upper-strike call creates a ceiling on the upside – in other words, today’s trader isn’t looking for the sale of Sabine Pass to result in a break of the standing $41.99 high anytime soon. Shares in Cheniere Energy were down 11% for the year to date heading into today.

LOW – Shares in Lowe’s, the world’s second-largest home-improvement retailer, bounced nearly 5% higher to $24.74 today, despite reporting a one-third decline in its Q4 net income. The company’s CEO said he did not anticipate a recovery in the housing market until next year. Option volume advanced to 6 times the normal level, with a largely bearish bent to equities trading second-guessing that counterintuitive move higher in share price. It appears as though some traders may have looked to enter long put spread positions between the 22.50 and 25 strikes, selling the lower strike for 30 cents toward the purchase of the 25 strike at $1.30. Elsewhere the July contract was in focus as traders looked to sell volatility, possibly going short the 25.00 strangle while calls one strike higher traded to the middle of the market at $1.05.

ABK – News emerged this afternoon that a consortium of leading banks has struck a deal to rescue municipal bond insurer Ambac, good news reinforced by S&P’s decision to maintain the Triple-A rating of both Ambac and MBIA. Shares in Ambac gained 14.6% on the development, closing at $12.28. Earlier today, option traders were positioning long volatility via the 10/12.50 strangle, paying a $3.15 premium – more than a quarter of the current share price – to profit from a break above $15.65 or below $6.85. The mood has now shifted to the upside, it seems, with traffic in the 12.50 calls picking up sharply this afternoon. Open interest in Ambac shows 1.5 calls open for every put.

XLF – Shares in the financial sector ETF reversed early losses after news of the Ambac bailout, closing .51% higher at $27.34 this afternoon. Interestingly, the nearly 300,000 contracts trading on our platform this afternoon showed 3.6 times as many calls trading as puts, much of this at the April 28 strike. More than a third of today’s volume on the XLF traded in April 28 calls, bought heavily at 95-98 cents for the right to purchase XLF shares for $28 in April, thus implying a return to early February levels this spring.

WB – Wachovia – Shares in the financial services giant – one of a number said to be involved in the Ambac bailout plan – closed 1.2% higher this afternoon at $34.73. This current share price represents 10 times the company’s earnings, the next round of which is due on April 16. Shares in Wachovia have traded as high as $55.65 over the past 52 weeks, an erosion that shows in its 75.9% historic reading. Interestingly, while this morning’s volume appeared to coincide with that April earnings-correlated contract, the position involved about 25,000 lots in a short strangle position. In this strategy, the trader would take the $4.05 premium in the expectation of Wachovia shares remaining within the range delineated by the two strike prices in the strangle. This is a strategy often deployed when volatility is high and the trader expects it to level off sharply heading into expiration.

GTXI – Shares of drugmaker GTx bounded 37% higher today to $17.70 after the company reported that an experimental drug in its pipeline met treatment objectives in late-stage clinical trials involving patients with advanced prostate cancer. The drug, toremifene citrate, is used to treat hormonal side effects of a common prostate cancer therapy. While total option volume surged to more than 12 times the normal level, and calls are out-moving puts by 7 to 1, it appears that much of this traffic is involved in front-month call selling at the 17.50 and 20 strikes, implying a sharp pullback in GTx shares once the frenzy of the clinical trial announcement abates. Further evidence of contrarian positioning was seen in the April contract, where it looks like traders went short call spreads between strikes 15 and 22.50. In this case, the trader would have sold the 15 calls for $3.70 and bought the 22.50 calls for $1.30, initiating the trade with a $2.40 credit that yields a break-even at $17.40. Ideally, the trader is hoping that both options expire worthless.

QCOM –Shares in microchip maker Qualcomm closed flat at $43.50 after the company joined its longtime legal adversary, mobile phone giant Nokia in agreeing to turn down the heat on some ongoing patent-infringement claims while awaiting the resolution of contract case in Delaware. The most striking play we observed on back of this development was collar activity in the July contract, involving 20,000 lots at each strike. The trader in this case would be playing against an existing long position in Qualcomm stock, buying the July 32.50 put for 74 cents and selling the 50 calls for $1.64. In order to break even in this case, the trader needs to see Qualcomm stock trading a $43.10 by expiration.

NTAP –Shares in network storage maker Network Appliance advanced 3.5% this afternoon to $22.88 as calls traded at their highest level since November. In addition to heavy front-month traffic in March calls strikes of 22.50, 25 and 27.50, we observed selling pressure on March 25 puts at $2.50, and fresh long positions in April 22.50 at $1.80 apiece. A huge chunk of today’s volume appeared centered at this strike, which conveys the right to buy Network Appliance shares for $22.50 by April’s expiration. We can as yet see no news catalyst for the development, which has sent overall option volume to 4 times the normal level.

DNA – The FDA’s much-fraught approval on Friday of Genentech’s Avastin for the treatment of breast cancer sent shares hurtling 8.4% higher to $77.60, with option volume more than tripling on back of the announcement. Option traders appear to be taking profit in March 80 calls, which have more than doubled in value from Friday’s 45-cent premium to $1.10 today. Doubling in premiums was also observed today at the 70 call strike, which is where much of Friday’s volume was centered. Traders bought and sold those calls at $4.10 on Friday, and evidence that the buyers were on the right side of the trade is seen in today’s $8.40 price-tag on the position. Some optimists even bought into calls at the June 90 strike, implying a 4% break above the 52-week high heading into June.

TTWO – Take Two Interactive – This morning’s unsolicited, $26-per-share takeover bid by Electronic Arts sent shares 55% higher to $26.93, blasting past its previous 52-week high, while option traders put the equivalent of almost half its open interest in play, amounting to 9 times the normal level of volume observed in this ticker. This played out in heavy call buying in the March contract at strikes of 20 and higher. With speculation percolating as to how high the haggling may go in Take Two, we observed fresh long positions in the June contract at the 27.50 strike for $1.40. This would suggest that some option traders believe that the opportunity to buy Take Two at an 11% premium to EA’s offering price in the month of June is a bargain.

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