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Thursday, February 29, 2024

As Amgen sets new 52-week low, traders hunker down for downside

Today’s tickers: AMGN, SHW, BSC, XLF, MS, LEH, GS, EWJ, SRZ, SHPGY, INTU

AMGN– Option traders are cushioning defensively against further downside in shares of drug maker Amgen, which lost 4% today to trade at $41.21 – this despite a federal judge ruling in favor of Amgen in a drug patent suit against Roche Holding AG involving an anemia drug. What’s interesting here is the gradual upward climb in the implied volatility of Amgen options over the past 5 days – as of last Thursday, the reading stood at 30%, with option traders expecting no extra fluctuation in share price above and beyond the 30% degree of historic volatility. Since that time, the implied vol reading has increased by nearly half, and with shares now at a fresh 52-week low, option traders are pricing in an added 20% risk premium over the next month. And they’re seeking protection from declines via April puts at strikes of 37.50 and 40, both of which traded to buyers on volume more than twice the open interest today. Heading into today, open interest had favored the bullish calls by a factor of 1.5.

SHW– Despite a 5% gain in its share price today to $53.84, option traders are taking anything but a rosy-red view of paint maker Sherwin-Williams’ prospects heading into the second half of the year. Last week, Crain’s Cleveland Business reported that the company’s CEO painted a bleak view of the outlook for the homebuilder sector, upon which Sherwin-Williams is heavily dependent, and stating that he did not anticipated a rebound in the market for new homes before 2009. As for today’s option action, traders sent overall volume to more than 16 times the normal level with a trader closing out a position in the March 55 puts and rolling into the June contract at the 50 put strike for $3.00. It’s significant to note the price positioning here, as it implies a new break for Sherwin-Williams shares – which are down 7.8% for the year-to-date – below the standing 52-week high of $49.98 set back on March 7. In fact, the buyer of this June 50 put doesn’t stand to profit until shares drop another $2 below that 52-week low

BSC – Options action in Bear Stearns is retaining all the nerve-racking swagger of its pre-crash levels today as the share trades an astounding 25% higher at $6.02 – more than three times its value per JPMorgan Chase’s Sunday night fire sale bid. While the conventional wisdom early in the session was that traders were wagering on a possible vote against the JPMorgan Chase takeover by shareholders incensed by the “derisory” nature of the $2-per-share bid, we also heard talk that the share price upside was being driven higher by senior debt holders buying up stock in order to push through the JP Morgan Chase bid. In any event, the drama has fueled massive speculative volumes in March calls and puts well in excess of open interest, even as these bets have only two days before expiration to come to fruition. Fresh buying interest was noted in March 5.00 puts and 10.00 calls, and the fact that similar volumes are reported at both strikes may be evidence of strangle positions going through – a long volatility position that costs just 45 cents to enter today, given the puny time value, but one that would pay off for the trader with a break below $4.55 or above $10.45.

XLF – A 75bp rate cut from the Fed added sugar to a particularly sweet mood in the market today, a mood that began with decent-under-the-circumstances earnings numbers from Lehman Brothers and Goldman Sachs. Early today, implied volatility in SPX options correlated to the S&P dropped more than 10% in early trading. Shares in the ETF representing the financial sector, long the S&P’s Achilles heel, gained 7.6% to $25.25 and the 954,000-plus options trading this afternoon showed twice as many calls trading as puts. A huge chunk of today’s volume was centered at the March 25 call line, which traded to buyers and sellers as the value of the position appreciated by more than a third in early trading. Volume one strike higher, at the 26 line, was bought heavily for 17 cents apiece. Call-buying in the April contract has fixated on the 25 line for $1.27 apiece.

MS – There’s no denying the audible sigh of relief resonating across the brokerage space after today’s brokerage numbers – it’s a sound that rippled through the implied volatility readings of the entire sector. Nowhere was this perhaps more pronounced than in Morgan Stanley, whose earnings are due out of the gate tomorrow morning. The fact that its implied volatility came off more than 43% after Lehman Brothers and Goldman Sachs reported earnings today – and now at 60% is actually a smidgeon below the historic reading – illustrates just how much heat is off Morgan Stanley with the market now somewhat reassured that two of its brokerage peers will remain among the living. The implication of this, of course, is that when volatility comes down, so too do option premiums, and the price of the $40 at-the-money straddle at $3.60 is now predicting just about an 8% up-or-down move on back of the earnings announcement. This should make for a more reasonable offer for traders looking to position long volatility today ahead of Morgan Stanley earnings tomorrow, and may explain the surfeit of activity we’re seeing at the 40 line, trading to buyers and sellers. Calls at the 45 strike were bought for around 40 cents apiece in a cheap upside bet, but we note here that the implied volatility reading of 95% on the March 45 call is well below that of the 40 call, implying less demand for substantial upside in Morgan Stanley. Heading into tomorrow’s earnings announcement, put positions outweigh calls by a factor of 1.4. Shares, meanwhile, are 17.5% higher at $42.73.

LEH, – Where yesterday’s at-the-money straddle – then the $30 line – supposed that one-third of Lehman Brothers’ value was at stake, this morning’s better-than-expected numbers sent Lehman’s share price clawing back to the upside. Shares are up 44% to $174.66 as of this writing, with more than 465,000 options in play and heavy volume at the 40 call strikes in March and April. In the case of the front-month strike, the value of that position gained 300% to $5.30 overnight.

GS – Shares are up 15.6% to $174.66 in afternoon trading, with the 259,000 active option contracts matching up to nearly 30% of its open interest in play. Call-buying, especially in the April contract, is evidence of a renewed vote of confidence in Goldman’s prospects, with calls at the 175 and 180 strikes selling for $5.50-6.00 in the case of the former strike and $4.20 in the latter attesting to confidence in continued upside through the month of April.

EWJ – This morning’s rebound in the Nikkei was sparked by bargain-hunters sifting through the wreckage of a three-session decline. Shares in the iShares MSCI Japan Index Fund were up 2.6% to $12.17 in US trading this afternoon. Shares in the fund, which correlates to the performance of the Japanese stock market, are down more than 10% for the year to date, and today’s upsurge in value may have emboldened a trader to stake fresh long bets on June 12 puts for 80 cents. The price of this contract implies a pull back below the standing 52-week low of $11.53 by June’s option contract expiration or before. The implied volatility reading on this index shows the option market pricing in a 40% risk premium against the historic average, and today’s action in anticipation of a new campaign lower for the Japanese market, was sufficient to send option volume to nearly 5 times the normal level.

SRZ –Shares of Sunrise Senior Living, which owns and operates assisted-living centers for senior citizens nationwide, cratered some 15% to $19.47 this afternoon, following news that it had missed an extended deadline for the filing of its 2006 annual report. Sunrise is embroiled in a far-reaching accounting scandal that has led to a formal government inquiry into its accounting and insider stock sales. While implied volatility on all Sunrise Senior Living options swelled some 20% to more than 80% on the news, it’s worth noting that the brunt of today’s volume is situated at the March 20 put strike – which is trading on an implied volatility of more than 151%, implying a huge demand among option traders despite a 3300% spike in premiums. This sent overall volume to nearly 10 times the normal level. Heading into today, the company’s modest, 24,000-strong open interest was fairly evenly divided between puts and calls.

SHPGY – Just days after posting gains on back of bid-talk from Pfizer, American depositary receipts in Shire PLC were given a 5.5% boon to $63.39 on speculation from UBS analysts that Astra-Zeneca might consider a takeover of the company. With option traders currently pricing in almost a third more price volatility from Shire over the next month than they have shown historically, option volume itself accelerated to two and a half times the normal level. What’s interesting here is the concentration of volume in the July call, where more than half today’s total volume appears localized in out-of-the-money calls at the July 72.50 strike. These were bought for around $3.10 apiece, implying a move to within $5 of the $80.74 52-week high by July. Volume of 1,000 lots at each of the 75 and 80 call strikes suggests encroachment upon the 52-week high itself. Option traders currently hold almost 5 times as many call options as puts in Shire.

INTU Positive analyst buzz in Intuit, the maker of TurboTax software, sent shares on a 3.6% upward trajectory to $26.35, bouncing off the 52-week low. Option volume, meanwhile, surged to nearly 12 times the normal level in early trading with out-of-the-money call buying at the March 30 strike. The 5-cent price tag of this position is handily explained by the miniscule time value of the contract – shares only have until Thursday to make a move past $30 and the odds currently favor virtually zero chance of that happening. Intuit shares are down 17% for the year to date, narrowly underperforming the S&P Information Technology Index.

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