Today’s tickers: WY, CSCO, CTSH, ELN, BIIB, ANR, ORCL, MAR, A, IP, HBC, RKH
WY, -On the cusp of a week that will bring about its much-anticipated earnings report, calls in North America’s top timber producer Weyerhaeuser are trading on their heaviest volume in at least a year. Today’s 4.5% gain for shares to $55.88 caps off a two-week period that’s seen an 18% bounce back in its shares. Weyerhaeuser is still down nearly 25% for the year to date, and has reported declining earnings over the past 4 cycles. Barely two months ago, Weyerhaeuser shares sustained a 7.6% one-day hit after the company announced a wave of job cuts and denied reports that it might be planning convert into a real-estate investment trust. The company is still looking to divest non-core assets, including a shipping line and several regional railroads. It is against that backdrop that we see its options trading on an elevated implied volatility reading of 46.0% against the 39.4% historic reading on the shares. Front-month options are currently pricing in as much as a $4.20 move (7%) on back of the numbers, and with calls outmoving puts by 7 to 1, there is much to suggest a move to the upside from current levels. August 55 and 60 calls are particularly active this afternoon, well in advance of open interest and on sharply higher premiums. Interest in the 60-strike calls extended into the October contract, trading at $2.85 apiece – we’ll continue to keep a watch on this ticker throughout Monday, before the numbers are out.
CSCO, – Also due to report earnings next Tuesday is network equipment maker Cisco. Shares are .32% higher at $22.06 today and implied volatility on its options at 40.5% compares to a historic reading of 35.6% on the underlying stock. The price of the front-month at-the-money straddle suggests a $1.73 move (7%) already baked into option premiums at present, and we are seeing heavy two-way traffic in August calls at strikes 20, 21 and 22, along with 22-strike puts.
CTSH, – Shares in technology consulting and outsourcing firm Cognizant Tech Solutions rose 4.5% to $29.32 on better-than-expected quarterly numbers, even as it offered discouraging guidance for the upcoming quarter. The news elicited an increase in options trading to 7 times the normal level as traders shed August 30-strike calls at 60 cents, essentially calling a top on the immediate upside. A volatility seller also appears to have written a 6,000-lot strangle in the October contract between strikes 25 and 32.50, taking in a $1.80 premium in the expectation that shares will remain rangebound between those strike prices into October.
ELN, – “Weekus horribilis” for drugmaker Elan took hold today after its multiple-sclerosis drug Tysabri was implicated in new cases of a lethal brain infection. Coming hot on the heels of another product disappointment – underwhelming data on a much hoped-for Alzheimer’s drug in development – Elan Corp shares were stripped of 50% of their value to read $9.86. The collapse put paid to options traders who believed this week’s first selloff would find some support at the $20 level – earlier this week we observed a good number of traders selling $20 August puts in a bet that the first selloff of the week was overdone. The magnitude of today’s surprise is perhaps best articulated by its implied volatility reading, which spiked 111% earlier in the session to 123.3% – more than any other company today. Tellingly, now that its share price has moved below the lowest strike available on the options calendar, our implied volatility reading has gone black. More than 423,000 options have traded as of this writing – equal to more than a third of its total open interest – with a slight volume privilege to puts. As we observed earlier this week, traders are playing both sides of the selloff, with two-way traffic in excess of open interest in August calls at strikes 12.50-19 and in puts at strikes 10-15.
BIIB, – The action was similar in Elan’s Tysabri partner Biogen Idec, whose shares are down 28% at $50.11 at present as options trade at 14 times the normal level, Earlier today we observed strangle positions going through in the front month at the 50/55 strikes. The combined premium of $3.75 would cover a buyer in the event of a recovery above $58.75 or continued collapse below $46.25, while a seller of this position would likely be taking advantage of the 51% spike in implied volatility this morning to take in a credit and wager on rangebound, depressed share price action over the next 2 weeks. In general, however, much of the heavy volume in the front month is trading to buyers as well as sellers, making it hard to get a handle on the prevailing order flow. Calls are outmoving puts by a factor of 1.7.
ANR, – Reports out this morning that steel giant ArcelorMittal may horn in on Cleveland Cliffs’ rocky acquisition of coal miner Alpha Natural Resources didn’t hurt shares in the coveted takeover target. Shares rose 6.3% to $105.19 and options volume of more than 41,000 qualified the company for our scan of top-50 most-traded companies this afternoon. Early action suggested traders positioning in long strangles at the 100/105 lines, a position that for a combined premium of $9.90 would cover the buyer in the event of a breakdown below $90.10 or above $114.90 – redolent of the heady sparks that could fly in a bidding war. Fresh positioning in the September 105 calls showed these contracts trading to buyers and sellers at $10.00 per contract.
ORCL, – With a fair amount of merger speculation moving options in the technology and biotech spheres this week, we continue to be fascinated with the manner in which option traders buy and sell volatility in companies active in the M&A space. To that end we point to action in Oracle’s March contract, which occurred against fairly humdrum price action, a .19% decline from yesterday’s levels to $21.49. In a raft of opening positions, a trader unloaded March puts at the 17 strike (trading at 65 cents per contract), the 19 strike (trading at $1.15), the 20 strike (trading at $1.45) and the 22 strike (trading at $2.35), and crossed the sentiment divide to sell March calls at the 24 strike for $1.35. A couple of scenarios may be going on here – the most prosaic being that the customer simply believes that March volatility is overpriced and is simply writing these puts in a bid to close them out cheaper later. Alternatively, he or she may be speculating that Oracle might be taken over for $20-24 in cash – or even hedging against a position aimed at Oracle being the acquirer (as they usually are these days) in a large transaction. We take pains to note here that there are no specific rumors regarding Oracle in this capacity, and we are careful not to propagate anything suggesting the contrary; the March activity is interesting noneth
MAR, – Dog days for the U.S. consumer have dogged hotel chain Marriott International relentlessly this season. Shares in the company (whose options have tended to show tremendous susceptibility to takeover chatter) are have lost $10 in value since May. Today, a boost in option trading volume to 3 times the normal level showed a trader electing not to play the contrarian (or the M&A game, for that matter), instead positioning for downside well in advance of the company’s next earnings cycle (numbers are due out on October 3). The fact that shares are trading 4% higher at $26.97 and implied volatility at 47.8% is well below the 57.9% historic reading likely added inducement for the trader to position defensively today. This was done via a 6,000-lot put spread in the October contract between strikes 20 and 25, a position added for a debit of $1.50, and requiring a decline to $23.50 – 11% off current levels – before the position begins to make money. This could imply a new break below the 52-week low of $22.29 before all is said and done.
A, – Unusual options action in Agilent Technologies, the maker of testing and measurement equipment for science and industry, suggests some traders looking for new break of the 52-week high in connection with its August 14 earnings or before. Options are trading at 4 times the normal level at present as shares register a decline of .17% to $36.00. Implied volatility at 34.5% comes in right in the middle of the 52-week range for Agilent but is elevated above the 24.8% historic reading on the stock. It appears here that a trader seized upon the marginal pullback in share price to buy a sizable position in 40-strike calls for 12 cents apiece. The price level here reflects about a 9% probability of the position landing in the money by August 15. Agilent shares last traded at the $40 level in mid-July 2007.
IP, – Options in cardboard and corrugated products maker International Paper continue to tear up the rug today with shares up another 2.8% to $28.49 – capping off a week in which its shares have racked up a full $6 to the upside on better-than-expected earnings. Yesterday its call volume shattered a new 52-week high and today we find its options trading at more than triple the normal level due to some fresh positioning in January 30 calls. This time around, it appears that the trader sold most of these options at about $2.10 apiece – taking in premium to take advantage of the rich time value of the position, and perhaps anticipating a correction in share price heading into January.
HBC– With Europe’s largest bank, HSBC Holdings, due to report interim earnings on Monday, option traders’ interest continues to focus on the September 70/80 put spread – a position that attracted volume earlier in the week. Shares are .84% higher at $83.20 at present, but a long buyer of the 70/80 put spread would pay a $2.15 premium today for a position that first breaks even with a decline to $77.85 (5% off current levels) by September 19. The 10,000-lot position here qualified HSBC Holdings for our early-morning scan of actively traded options.
RKH– Much of the tense news flow surrounding troubled regional banks has died down in recent sessions – and that’s had a sedative effect on option implied volatility in the Regional Bank Holders Trust, which has come down about 25% from its mid-July highs and now at 52.0% sits below the historical reading of 64.7% on the underlying stock. While it may be far too early for traders to be speculating on a recovery for the regional bank space, it looks like one trader used a 6,000-lot long collar in the November contract to protect hoped-for gains in an underlying stock position. This was done by buying 100-strike puts at $9.20 apiece and taking a little discount on the purchase by selling 125-strike calls for $2.90. The $6.30 price tag will protect the buyer against a drop below $100 in November, while the short upper strike will result in the underlying shares being called away – a fact that the trader may not mind, appreciating the added yield.
