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Sprint Nextel fallout gathers pace as analysts trim expectations

Today’s tickers: S, VIX, TIE, AAPL, BAC, DELL, DF, NTAP, MF, CTXS & ATHR

SSprint Nextel. There was no hiding the disappointment behind a sizeable broader market sell off. While earnings yesterday were sloppy and accompanied by a huge goodwill write down related to the 2005 merger, analysts today reeled in response to the news that customer defections are at a three-year high with one noting that growth for the company isn’t on the agenda until 2010 at least. In response Sprint Nextel’s share price slid a further 9% to $7.39 and further induced bearish option plays. In the January contract, it appears that the 10.0 strike calls may well have been sold 16,000 times at around a premium of $1.00 in exchange for a hunt for downside reward at both 5.0 and 2.5 strikes. The former traded 11,800 times at 0.80 while the 2.50 strike jumped to trade at 0.25 some 5,100 times. With a worsening in the economy being priced in day after day, the pressure on this telecommunications company at least is reminiscent of the collapse of the sector in the recession of 2001. Option traders apparently are in no mood for a rally.

VIX CBOE volatility index. Option traders in the volatility pit are in no mood for optimism today. Calls on the index in the March contract were bought at all strikes from 25 through 35, while puts from 25 through 20 were unceremoniously dumped. It was a loud shriek from traders that today’s sell off might not mark a one-off decline, but that nasty conditions might be here to stay. Even extending their time horizon to the April contract, investors bought calls at the 32.5 strike at around a premium of $0.90. While the VIX has spent little time actually trading above a level of 30 in 2008, those calls would still appreciate if the VIX even rallied towards 28. The market does feel as if it’s positioning for a sizeable move.

TIETitanium Metals Inc. disappointed investors late Thursday with an earnings-miss and so became the largest decliner in the S&P 500 index Friday morning. Option volume of 27,000 represented around one-in-four of the existing open interest in the stock options with what looks like a sold strangle at play in the April contract. The company specializes in the manufacture of titanium-related products for use in the aerospace and industrials industries. The 17.5 puts and the 25.0 strike calls traded on volume of at least 6,000 contracts at a combined premium of $0.86. Since both strikes traded to the middle of the market, it’s hard to tell whether the combination was bought or sold.

However, we do note that the latest 52-week low occurred at around the lower strike price in January and perhaps a seller of the strangle believes that the despite yesterday’s earnings, the outlook for the share price isn’t so bleak. Even on a break of the recent low, the received premium leaves the investor nursing losses only if the shares break beneath $16.64 for a decline of 25% from today’s $21.98. On the upside the investor remains clear of losses so long as shares remain beneath $25.86. Incidentally the recent share price peak following a rebound for the stock as recently as last week was $25.48. Today’s 8% rise in option implied volatility works in the favor of a premium seller who’d benefit from the time erosion of premium on this trade as the waters settle.

AAPLApple Inc. Shares are 2.7% lower today at $126.46 as the market melts. Still Apple call options are trading in ascendancy over puts. Implied volatility continues to rise while the 130 and 135 strikes continue to be bought despite weakening premiums today.

BACBank of America shares are lower by 3% at $40.16 while a 10,000 lot call trade in the May 47.5 series is the largest single print in today’s volume. Option activity is evenly balanced with 71,000 contracts in play.

DELLDell Inc.– Despite an earnings miss on Thursday, early buyers still sent Dell shares higher before the weight of the broad market sent its share price lower. 93,000 options contracts are on the table today with the March 21.0 strike puts proving most populous but changing hands at slightly lesser premiums today owing to a drop in implied volatility to 35% post earnings.

DFDean Foods announced the sale of an additional 18.7 million shares via a registered public offering closing March 5. While this ultimately dilutes EPS, the company stood by its prior forecast of “at least $1.20 per share for 2008.” Investors sold the stock down 7% at the open to stand at $21.40 while option implied volatility has jumped almost one quarter to 36.9%. Investors are taking a fresh look at the June 17.50 puts where currently sparse open interest exists. Premium at the strike of $0.70 has doubled overnight and affords downside protection beneath a share price of $16.60.

NTAPNetwork Appliance Inc. Implied volatility jumped 17% to 49% as shares dropped 4.0% to $21.68 following a broker rethink to “neutral.” Earlier this week there appears to have been a keen buyer of the April 22.5 calls and the same pattern is repeating itself today with 20,000 calls changing hands at a premium of $1.25 – down a quarter dollar on the day. A bull is looking for a share price of at least $23.75 before expiration. Volume across the board represents more than 15% of existing open interest and included what looks like the sale of 2,225 January calls at the 30.0 strike for $0.95.

MFMan Financial Group is once again one of the stand-out option plays on Friday as investors continue to pound the stock after more details emerge over the unwind of some damaging wheat futures positions. Having debuted in July 2007 as a public company at a share price of $30.00 shares today breached the $20 before accelerating to a low of $14.00. That share price leaves the lowest available option strike series at 20.0 where curiously buying and selling of both calls and puts is relatively even. In the March 22.5 calls, around 1,277 of the overall 2,240 volume was purchased earlier as premium slipped to $0.40. Apparent optimism prevails amongst option traders despite an earlier trio of broker downgrades on the company. Separately, Atlanta-based ICE noted that a third-party clearinghouse was monitoring trades. Implied volatility has surged across option premium to 82% from 35% before the trading revelation. On the June 20 straddle for example, where option traders get a sense of how far a share price is expected to move, the current price of $7.90 implies a trading range for the share price of between $12.10 and $27.90 by the summer.

CTXSCitrix Systems. Option volume of 19,800 on Friday compares to open interest of 65,000 contracts creating an appearance on our “hot volume” market scanner. A 3.9% price decline to $32.59 has spawned fresh opening trading interest in both the April and June 30.0 strike puts. The 0.26 delta on the April series infers around a one-in-four chance that the share price will decline to $30.00 by expiration. More than 17 puts are in play per call on Friday.

ATHRAtheros Communications has plenty of options interest in early Friday trade. An equivalent one-in-five options contracts are at stake today with 18,700 options now showing a slight call-side bias after an earlier hunt for puts. With its shares lower by 6.7% at $24.50 there has been decent two-way traffic in the April 25.0 strike call series. Early sellers of the same-strike June series dumped decent volume at a price of $3.20 before the share price created weaker call premium to the gratification of the seller. The latest quote here is $2.75 offered.

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