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Saturday, September 24, 2022


Managed-care takes another hit…and Caterpillar volatility still elevated

Today’s tickers: CAT, TMA, UNH, HUM, CVH, RIO, MSFT, COF

CAT – Shares in Caterpillar, the iconic maker of steam-shovels and bulldozers, hammered 4.3% higher to $75.74 today after the company surprised the market with a lift in its 2010 sales forecast. Caterpillar CEO Jim Owens said the company stood to profit handsomely from the construction expansion projects in the emerging markets as well as infrastructure upgrades in North America and Europe. The gain in share price elicited a 100% gain in call volume for Caterpillar this morning. What’s interesting to note here is the gradual upward spike in implied volatility over the month of March and how it remained unchanged after today’s positive news announcement. Since the start of the month, implied volatility in all Caterpillar options has gapped 30% higher, remaining steady at 32.5% today even after the amended sales forecast. This shows about a 14% risk premium to Caterpillar shares over the next month, and may explain the brisk trading in March 75 puts, as well as calls at the 75 and 80 strikes, that could suggest volatility trades on the rise today.

TMA – From extreme unction…to extreme liquidity? Thornburg Mortgage, the jumbo-adjustable-rate mortgage lender that tanked last week when it failed to meet a margin call, recovered 110% from yesterday’s levels to read $3.30 in early trading. The move came after a Bear Stearns analyst surmised that yesterday’s move by the Fed to grease the hinges of the credit market by expanding its securities lending facility would greatly aid Thornburg’s chances of survival. The doubling in share price sparked a veritable trader’s market in March 2.50 calls, which went to buyers and sellers for around $1.25 apiece on volume nearly twice the open interest. The move to sell puts at the 2.50 strike suggests that, indeed, the darkest hour of “extreme unction” for troubled Thornburg may have passed, and that the share price may reasonably be expected to hold on to current levels for the duration of the March contract. Option premiums suggest a better-than-75% chance of that being the case.

UNH – Another bearish upshot for the managed care companies followed today’s announcement by the nation’s second-largest Medicare servicer, Humana, that it would lower its earnings guidance for the year due to rising prescription costs. While the impact on Humana’s share price and option activity was swift and sure (detailed below), we observed a higher uptick in implied volatility and option volume in the first-largest Medicare drug-plan servicer United Health. Option volume quickly surged to 5 and a half times the normal level in concert with a more than 10% spike in implied volatility to 49.5%. Traders today appear to be skipping long stones across the March 35 puts, with heavy buying interest at this strike in the March (trading at more than double the open interest), June and September contracts. UnitedHealth shares set another 52-week low this morning, down 5.1% to $36.27.

HUM –Investors punished Humana, meanwhile, with a 26.7% rout in its share price to $34.74, capsizing below yesterday’s lows. Options are trading at more than 3 times the normal level, with buying interest at the March 35 put strike and one strike lower heading into April. Implied volatility at more than 87% shows about 18% more price risk to Humana shares over the next month than they have shown historically.

CVH –While Coventry’s 7.74% share-price smackdown to $39.65 may be evidence of the company taking a sympathy-hit on the current straits of fellow Medicare drug plan servicers UnitedHealth and Humana, implied volatility at 47% actually suggests option premiums pricing in about 16% less risk to Coventry shares over the next 30 days than they have shown historically. We wonder if that disparity may encourage long volatility positions later today. In the meantime, puts are trading at twice the rate of calls in Coventry, with heavy volume in the January ’09 60 puts – possibly evidence of profit-taking on an existing positions – and fresh volume in April 40 calls.

RIO – Companhia Vale do Rio Doce (CVRD) – Shares in Brazilian big-three miner CVRD surged 3% in early trading to $34.62, and while the volume ratio of puts to calls shows 3.5 puts trading for every call, much of this action appears tied up in short ratio put spreads, implying continued upside for the share price. It looks like this strategy was deployed in the June contract at strikes 27.50 and 32.50, where it looks like traders bought 2 of the lower strike put at 90 cents per contract against the sale of the 32.50 strike for $2.51. The limited-risk strategy rewards the trader with an initial credit of 71 cents per contract in the expectation that both strikes will expire worthless in June. Today’s share price represents about a 9% discount from the 52-week high.

MSFT –Shares in the software giant notched .48% higher to $29.42 today, and with more than 73,000 options in play in the first 2 hours of trading, Microsoft is one of the most active tickers on our platform. Heavy traffic in March calls at strikes of 27.50, 29 and 30 trading to buyers and sellers has helped send call volume to 2 and a half times that of puts. But we also noted earlier today what appeared to be long put spread activity in the April contract, with an investor selling puts at the 26 strike for 20 cents to defray the purchase of 27.50 puts for 44 cents apiece in a play on an April pullback in its share price. With shares sitting just below the $30 shelf as of this writing, the delta on the March 30 call shows a 1-in-3 probability of Microsoft shares closing above $30 by March 20, while the probability for April is slightly less than 50/50.

COF – Today’s 260% increase in call volume in Capital One is a strong indication that option traders are confident in the near-term staying power of a 6% gain in share price to $49.52. Much of this mood was conveyed through heavy buying at the March 50 call strike, which was attracted long positions at about $2.15 per contract, implying another 4% upside yet to come over the next 8 days before the contract generates profit for today’s buyer. It must be said that the posture among Capital One option traders has long been cowering – open interest shows 1.6 puts open for every call, a proportion that has remained more or less unchanged since late-January.

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