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Microsoft: Not-so-sweet numbers from Yahoo’s sugar daddy

Today’s tickers: MSFT, YHOO, MCO, YRCW, TLM, IMA, ONXX

 

MSFT– Last night’s earnings miss from Seattle software hulk Microsoft took option traders by surprise (calls had been trading at a 6-month froth heading into the numbers, as open interest at the front-month 33 call strike swelled from 2,500 lots to some 35,000) and introduced a new level of no-nonsense in response to the hemming and hawing of its bid to acquire Yahoo. Simply put, yesterday’s numbers indicate that Microsoft does not have the limitless wherewithal to let Yahoo name its price, nor can it afford to let the online leverage of a Yahoo acquisition go unharvested (especially given the success of Yahoo). Indeed, while implied volatility in Microsoft options has come off by 30%, Yahoo’s implied volatility is up by more than 20%. This is occurring as Microsoft shares staged a 6.3% decline to $29.80. With twice as many calls as puts trading today, many traders may be taking fruitless upside positions at May call strikes of 30 and above off the table. Puts at the May 28 strike are being bought heavily for 21 cents apiece, suggesting more downside yet to plumb for the mortal-seeming Microsoft.

 

YHOO – Shares in Yahoo! slid 2% to $26.75 and its implied volatility spiked by some 30% after Microsoft’s macro-soft numbers last night suggested that it may not be quite the software sugar-daddy that many Yahoo shareholders might have hoped. With more than 693,000 option contracts in play today, option volume in Yahoo was at its highest level since the original February 1 Microsoft “bear hug” was made public. Puts and calls traded on comparable volume, but what was interesting to note today was the level of fresh positioning in deep-out-of-the-money front month puts at the May 20 level. These traded on volume of some 77,500 lots – more than 7 times the open interest – as the value of this position sweetened more than 91% on back of Microsoft’s numbers alone. Much of this volume sold to the bid today, suggesting some traders turning sellers of premium on back of the volatility move today.

 

YRCW – Option traders gave a big 10-4 to the continent’s largest trucking company, YRC Worldwide, despite the company’s $46 million loss. The so-called less-than-truckload operator indicated that internal restructuring efforts had put it on the road to recovery, sending shares 29.5% higher to $16.79. While options in the trucker traded at more than 7 times the normal level, traders put twice as many puts in play as calls, and early in the session we noted buying interest in June and July puts at the 15 strike, possibly implying the prospect of a little expectation management in the market heading into the summer. Some critics say the current fuel-cost environment will make YRC Worldwide’s ambitious recovery a tough sell in the summertime market.

 

MCO – Options in Moody’s traded at 8 times the normal level of volume, matching almost a third of its open interest, with its earnings numbers fully two days past. Shares are down .30% to $37.00 and with puts outmoving calls by 15 to 1, it appears that much of today’s volume may involve the closeout of May put positions at strikes 30, 35 and 40. Fresh volume appeared at the August 35 put line, where the $3.00 price of the contract implies a drop below $32 by late summer. A decline of this magnitude would put Moody’s within 1 dollar of its 52-week low. We feel compelled to note in this regard that while the street applauded Moody’s quarterly numbers thanks to effective overhead cost controls, option traders are less broadly convinced. A look at total open interest shows more than twice as many put positions open as calls, a proportion that has remained largely stable throughout 2008.

 

TLM – Shares in Canadian oil and gas explorer Talisman Energy dipped 1.5% to $19.84 despite reporting plans to divest its Danish division, Talisman Oil Denmark Ltd., to Norwegian Energy Co. Option activity swelled to more than double the normal level with buying interest on either side of the June 20 line. While the volumes are disparate, it is conceivable that some positions may have been bought together in an at-the-money long straddle play suggesting a move of $2.80 above or below the $20 line in the month of June. An elevated implied volatility reading on all Talisman options suggests about a 15% higher likelihood of this kind of price swing over the next 30 days than the company has shown historically.

 

IMA – Inverness Medical Innovation – Shares in Inverness, the maker of Clear-Blue, Accu-Clear and Fact Plus home pregnancy tests, pared yesterday’s earnings-driven rally with a flat close at $36.06 today. Today its options remain coveted instruments for forward-looking price bets, continuing to trade at 3.5 times the normal level. With the equivalent of more than 10% of its open interest in action, traders are staking bets on the call side, with May 30 calls trading to the middle of the market at $6.35 in what may be a proxy play on the underlying stock. Action in the June contract showed ratio call spreads going through at strikes 35 and 40, where traders bought twice as many calls for $4.00 apiece, possibly using the sale of 40-strike calls at $1.80 to defray the costs in part.

ONXX – Onyx Pharmaceuticals – Onyx, the maker of so-called small-molecule cancer treatments that target proteins involved in tumor cell proliferation and growth, traded heavily earlier this week on supposed takeover chatter, and it may be lack of resolution on this front that has kept its option implied volatility so loftily elevated above the historic norm (at nearly 61%, the options market is pricing in one-fifth more possible price deviation over the past month than has been recorded). While shares showed marginal price movement today, down .71% to $36.30, the distribution of volume picked up by our market scanners suggests traders bracing for summertime downside – hardly the action of a would-be takeover target. Bearish credit spreads appear to have gone through in the June calls at strikes 40 and 50, with a trader selling the lower-strike call for $2.00 against the purchase of a 55-cent call at the 50 strike. The trader in this case is hoping that the spread between the two strikes will narrow and that both contracts expire worthless, allowing him or her to pocket the initial credit as the maximum profit for the transaction. Out-of-the-money put buying occurred in the August contract at the 25 strike, a position whose 70-cent price tag implies a break below Onyx Pharmaceuticals’ r52-week low of $24.60 by late summer.


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