Today’s tickers: MS, XLF, AUXL, CCU, ERIC, XLNX, SCHW, MF
MS – Tolerable numbers out of Morgan Stanley were good enough today for a market pointing up signs of survival out of the brokerage space. Investors rewarded its 42% decline in Q1 earnings – less dire than some analysts had predicted – with a near-8% rise in share price to $45.75 this morning. It’s interesting to see that the price of the at-the-money straddle yesterday portended a $3.60 up-or-down price movement for Morgan Stanley shares, today’s $3.10 upside price move appears to be right in range for that and the price of the $40 straddle has ballooned to $6.35, providing a nice 104% profit for traders who took the opportunity afforded by yesterday’s pre-earnings drop in implied volatility to position long the $40 straddle. With implied volatility continuing its comedown – now gapping some 28% below the historic volatility reading – calls in Morgan Stanley are outmoving puts by a factor of 1.3, with the current price of the April 45 call at $3.20 currently pricing in a better than 50/50 chance that Morgan Stanley shares can hold at current levels through April. A buyer of that position today would need to see another $3 in upside just to break even.
XLF– Financials are holding on to a 2% gain this morning, with the financial sector ETF at $25.92, aided by tolerable numbers this morning out of Morgan Stanley, and despite a bit of retracement to the downside out of the other brokerages. With more than 452,000 options trading in the first 2 hours of the market, the XLF remains one of the most active tickers on our platform, and what’s remarkable to note here is the pullback in implied volatility to just about 41% – this is down more than a quarter from last Friday’s super-elevated 57% level, and is well below the 48% historic volatility reading for XLF shares. March 25 calls have sold off quickly, as many traders may be taking advantage of today’s 40% increase in premiums at that strike to close out positions ahead of tomorrow’s contract expiration. The same strike in the April contract continues to attract buyers, open interest at this strike having mushroomed about 300% over the past 5 sessions. Selling at the 27 call strike could be an indication of some paring of upside bets among option traders all-too-cognizant that the sector is not yet out of the woods.
AUXL – Options in Auxilium Pharmaceuticals showed a 7-fold increase in trading volume today as shares posted a 2.7% gain to $25.93. Shares in the company, the maker of drugs for urology and sexual health disorders including hypogonadism, are down 12.5% for the year to date, but an interesting cluster of out-of-the-money call buying suggests some option traders are looking for a spectacular gain for shares past the 52-week high. It appears that a trader may have closed out a position in June 35 calls for $1.40 and moved the 5,000-lot position to the April contract at the higher 40 strike, where open interest was negligible before today. This position, whose 20-cent price tag reflects barely a 3% probability of landing in the money, would require an upside break of more than 11% past the $36.14 all-time high set back in mid-February. The mid-February gain occurred after the company’s marketed product, a topical hormonal gel called Testim, was left off an FDA list of treatments vulnerable to patent challenge from generic companies.
CCU – This morning’s news from Clear Channel Communications that it would once again extend the deadline for tender offers to bondholders failed to reassure investors about the state of its beset-and-beleaguered private equity takeover. Shares in Clear Channel, which have long been trading below the $39.20 price offered by suitors Bain Capital and T.H. Lee Partners as market patience has worn thin, dropped another 9% to read $32.70 heading into the noon hour. Implied volatility in Clear Channel options rose more than almost any other ticker on our platform today, up 57% as of this writing to 114.5%. The jag lower in share price may have elicited an unwinding of positions in March calls, which are due to expire tomorrow, as the value of these positions lost some 70% overnight. Meanwhile, it looks like volatility traders may be buying and selling strangles in April, using put strikes in the mid-20’s and call strikes of 30 and above. We should note in this regard that Clear Channel’s 52-week low is $28.00.
ERIC – The news out of Swedish wireless giant Ericsson this morning was, as the classic Scandinavian understatement goes, “inte så bra” (not so good). Earlier today, Sony Ericsson Mobile Communications Ltd issued a stark warning on its Q1 earnings and revenue, citing softer sales and higher research costs. The news sent Ericsson shares down nearly 10% in early US trading to $17.52 – plunging below the prior 52-week low – with option traders figuring in an 11% higher risk premium to Ericsson shares than is already apparent from its ignominious drop from a 52-week high of $43.41. Interestingly, Ericsson is a company that has shown a capacity to attract call buyers despite a slate of very underwhelming news – calls continue to outrank puts by a factor of 1.5. And that’s what we observed today at the April 20 strike, where traders bought calls conveying the right to buy Ericsson shares at a 13% markup from current levels by the April contract, for 20 cents apiece. We should note that Ericsson’s earnings announcement is scheduled for April 25, which will miss the expiration of the April option contract by 5 days.
XLNX – Shares in chipmaker Xilinx, which makes so-called field-programmable gate arrays – the chips whose programmability makes them more cost-effective and fast-to-market that application-specific integrated circuits – are trading .87% lower this morning at $23.95. Despite currently trading about $6 off their 52-week high, Xilinx shares are up 9% for the year-to-date, far outpacing the S&P Information Technology Index. But it seems some traders are taking a muted view of its prospects heading into the summer. Long put-spread activity involving 10,000 lots occurred in the April contract between strikes 22.50 and 25, with the trader initiating the transaction with a $1.05 debit that will generate profit as long as Xilinx shares trade between $22.50-$23.95. The same strikes were deployed in long put spreads involving 4,000 lots in the June contract, where the initial debit of $1.20 supposes a trading range between $22.50-$23.80. The activity was sufficient to send Xilinx option volume to nearly 5 times the normal level.
SCHW – Shares are down 2% today at $18.87, two days after an analyst ratings cut that cited an outlook for slower client growth at Schwab, and coinciding with a dramatic selloff in the brokerage space. An increase in option trading volume to triple the normal level showed heavy activity at the June 20 line, which traded to the middle of the market for $2.30. This may be indicative of a trader taking some of a position off a strike where most of the open interest accumulated in mid-February at around $1.85 per contract. Schwab shares have lost nearly a quarter of their value so far this year.
MF – Shares of MF Global were also hit hard in Monday’s brokerage selloff, but today have recouped 20% of their value to stand at $9.85. With option volume at more than 2 times the normal level today, traders appear keen to buy calls at the 10.0 strike in April for $2.50, these trading at almost double the open interest. September calls at the 17.50 line sold mostly to the bid for about $1.25, which may indicate buy-write activity among traders who own the underlying stock but are keen to enhance their yield by pocketing an initial premium and happily delivering the shares for a 78% profit margin if the calls are exercised by September.
