Today’s tickers: WFC, HNSN, MRK, SGP, JEF, C, TMA, FO, RIMM
WFC– Given an otherwise blithesome tone to trading in major financial issues today, we were intrigued to see a 1% tick to the downside in shares of Wells Fargo coincide with the heaviest level of put volume in two months. Shares are currently $29.08 – a solid $5 above the 52-week low for a company whose stock has registered a less-than-2% decline for the year to date, faring comparatively better than the likes of competitors Bank of America and US Bancorp. Whether today’s bump up in put buying is indicative of traders bracing for a writedown or a possible acquisition is unclear. What we can offer in this regard is that the present 55% implied volatility shows option premiums reflecting less risk to Wells Fargo shares than is already apparent from the shares’ 60% historic average deviation. Furthermore, traders appear be looking for protection from downside at out-of-the-money put strikes, most notably at the April 27.50 puts, which were bought heavily for about 80 cents apiece. Traders bought heavily into the same put strike in the July contract, possibly defraying the $2.30 cost of the position by selling puts at the 22.50 line for 90 cents apiece. The company made news last week when its CEO hinted strongly that the company would be open to an industry acquisition similar to JP Morgan Chase’s storied snatching of Bear Stearns if the deal were brokered by the Federal Reserve. Wells Fargo earnings are due out on April 15.
HNSN– Shares in Hansen Medical, the maker of surgical catheters whose shares have lost more than half their value so far this year, took another .42% cut to $14.26 today. More intriguing in light of its recent share price trajectory is the fact that its options are trading at more than 9 times the normal level today – equal to more than a quarter of its total open interest – with the action overwhelmingly centered in out-of-the-money calls in the June contract. We surmise that traders may be using call spreads, with long positions at the June 25 and 30 strikes funded in part by the sale of calls at the 35 and 40 strikes. This strategy would limit the initial cost outlay of an already-very-cheap upside bet to some 10-15 cents at each strike. While we have as yet seen no catalyst that might explain such an auspicious recovery – especially as its shares remain within 50 cents of the 52-week low – it is worth observing that option traders hold almost 5 times as many call positions as puts.
MRK– Last Thursday we observed an uptick in long volatility positions in Merck, ahead of a weekend presentation on the results of cholesterol drug Vytorin at the American College of Cardiology. Specifically, we noted traders going long the front-month 45/47.50 strangle in anticipation of volatile price action with no directional bias. The news out of Sunday’s conference was surprising even to the inveterate bears, as doctors at the Chicago assembly recommended without reservation that patients try existing cholesterol drugs on the market before testing Vytorin and Zetia, which Merck and Schering-Plough are marketing jointly. With today’s 15% decline in share price to $37.78 it seems the long volatility traders were particularly prescient – the long volatility strangle entered for $2.55 on Thursday is worth $7.35 as of this writing, and a look at the implied volatility reading in Merck options shows the market believes the carnage isn’t over – implied volatility rose more than 21% this morning, and now rates above the historic reading by more than half. Looking to capitalize on this development ahead of the curve, it appears that Merck option traders today are content to sell volatility at the April 37.50 put line, where the $1.20 price of the position is 1100% higher than it was on Friday. Call-buying at the April 40 and 42.50 strikes may be evidence of traders availing themselves of cheap bets for upside recovery – these out-of-the-money calls are trading for five and 10 cents a pop. In all, calls are outmoving puts by a factor of 1.3 with overall option volume moving at triple the normal level.
SGP– A similar setup was observed in shares of Schering-Plough, whose shares were stripped of more than a quarter of their value to read $14.46 heading into the close. Options volume surged to 11 times the normal level on Vytorin’s clinical fall from grace – with the current active volume in Schering-Plough measuring up to almost half of the open interest. Earlier today, as we observed with Merck, traders appeared keen to sell front-month puts at newly-invigorated premiums – case in point the April 15 puts, whose value rose 2000% overnight to $1.05. Many traders are writing this put position in conjunction with calls at the same strike in a classic short volatility strategy. Willingness to buy puts at the May 12.50 line for 45 cents and calls at the 15 line may be evidence of traders inclined to position long volatility in the May contract – buying these positions together would cover the buyer against a $1.35 move above or below those strike prices heading into the May contract.
JEF– Shares in full-service investment bank Jefferies Group gained an impressive 3.5% to read $15.97 this afternoon, tending directionally – but broadly outperforming – sector peers including Piper Jaffray. Its options, meanwhile, traded at nearly 4 times the normal level today – their highest since a late-February spike in volume was attributed to uncorroborated takeover chatter. While implied volatility has come off substantially over the past couple of weeks since Moody’s cut Jefferies’ rating outlook in the wake of Bear Stearns’ difficulties, option traders are still anticipating about 8% more turbulence out of Jefferies Group shares heading into its April 17 earnings report than they have shown historically. What’s interesting here is that traders appear keen to sell short April 15 puts for 85 cents well in excess of the prior open interest at this strike in an unmitigated wager on further upside. The long volatility plays appear to be going through at the May 15/17.50 strangle, which for $2.65 generate profit for the buyer with a break to the upside past $20.15 – past the price level Jefferies Group shares attained when the late-February takeover rumors bubbled forth last month – or a break below the standing 52-week low to $12.35.
C – Investors appeared cajoled by this morning’s announcement from Citigroup that it would separate its consumer banking and credit card divisions, meanwhile empowering regional bank heads in the company’s geographical divisions with broader decision-making mandates “on the ground.” While the market rewarded Citigroup shares with a 2% gain to $21.25 – outdistancing the gain in the XLF – a look at the 173,000 options trading showed a fair balance between calls and puts in terms of sheer volume, but a genuine willingness on the part of traders to buy into upside at out-of-the-money strikes in April and May at strikes 22.50 and 25.
TMA– It appears the final countdown is well underway for moribund mortgage lender Thornburg, which over the weekend secured a second deadline of Monday afternoon to raise $948 million to stave off margin calls Shares in Thornburg Mortgage tanked 29% to $1.17 this afternoon. The fact that 4 times as many calls were trading as puts should not necessarily be taken as an immediate vote of confidence in Thornburg’s ability to squeak through this latest funding crisis, as more than half today’s 21,000-strong option volume is rooted at the July 2.50 line, where traders are shedding the position heavily at just 15 cents apiece. Buyers, meanwhile, have been drawn to the $2.50 put line, which is selling for $1.50 today – implying that a buyer needs to see Thornburg shares drop below $1 just to break even on the trade.
FO– Fortune Brands, the maker of Jim Beam whiskey, rallied an impressive 8.5% to $69.29 after the Swedish government’s shock announcement this morning that its sale of national liquor monopoly Vin & Sprit (and its crown jewels, Absolut Vodka and Gammel Dansk aquavit), had been awarded to French spirits maker Pernod-Ricard. Fortune Brands, which already holds distribution rights for Absolut on a number of markets and would therefore stand to levy sizable fees to any new buyer, was the odds-on favorite to buy Absolut outright for that reason. Pernod’s upset sent Fortune Brands option volume to about 5 and a half times the normal level, much of it at the June 65 line, where it appears that traders may be selling the straddle, soused as it is with time value, for a handsome combined premium of $6.75. A trader in this case is looking for less price volatility out of Fortune Brands heading into the summer months with the fate of Absolut and any complications arising from its privatization into foreign hands now strictly a problem to be grappled with at Pernod.
RIMM– Option implied volatility in Research in Motion is already showing the juice ahead of the Blackberry maker’s Wednesday earnings report. Shares are 3% lower at $111.86, with option premiums factoring in about 20% more risk to RIM shares than they have been wont to show in the past. The price of the April 115 straddle in RIM, meanwhile, will set today’s trader back fully $16.15, but a look at the volume shows option traders preferring the call side of that equation. Long-volatility traders appear to be favoring the lower-priced 110/115 strangle ahead of earnings, which is $3 cheaper and covers the buyer against a move past $128.65 on the upside or below $96.35 on the downside.
