Today’s tickers: FCX, SNDK, VMED, UST, SKS, RIMM, EWW, ALU, EWH, WLP
FCX– Shares in global miner Freeport McMoRan continued their slump today amid the ongoing unwind in commodities. With shares reading 2.2% lower at $73.25, composite implied volatility on its options continues its uphill slant – now at 74%, this measure of anticipated share price fluctuation has risen 42% in the past week. Options volume has been brisk throughout the session, with more than 142,000 options trading by late session, and with calls outmoving puts by a factor of 1.7 it looks like some option traders may be seizing the opportunity to take contrarian bids through call positions, possibly mitigating some of their risk by using spreads. In one unusual play, we saw a trader use a 3,000-lot short collar in the November contract using a long position in November 100 puts and a short position in November 130 calls to sell volatility, possibly hedge an existing short position in the underlying stock, and certainly prepare for a possible bounce in share price. Using this configuration, the trader was able to take in an immediate $30 premium – 41% of the current share price – more of which this trader will be able to keep if Freeport McMoRan shares reverse recent course and trade higher, eroding the value of the puts.
SNDK – Early reports that Samsung is mulling a bid for Sandisk sent shares 28.5% higher to $17.29 and elicited a 23% spike in implied volatility to 81.3% (versus 54.5% historic). With options trading at 14.5 times the normal level, earlier today we noted some ambivalence among option traders as to the likelihood of a trade – while twice as many calls are trading as puts, there’s a healthy 2-way traffic of buyers and sellers of these contracts in the September, October and January contracts at strikes 17.50 and 20.
UST – Yesterday’s options market was atwitter with deal speculation involving US Tobacco, which sent implied volatility and call volume in the snuff maker sky-high. Today, a New York Times story offered affirmation that a deal between US Tobacco and Altria could be imminent, sparking another 24% upside in UST’s share price to $66.85 and keeping interest in its options brisk at nearly 85 times the normal level. Call and put volume has equalized this afternoon, with sellers drawn to September and October 60 calls – these positions, which were $6 out of the money yesterday are suddenly more than $7 in the money today, and the 2000% increase in value of the front-month 60 call (today this position commands $7.50) could explain why some traders are fine with taking a little profit here.
VMED – Options volume in Virgin Media rose to more than 8 times the normal level today owing to a 15,000-lot put spread in the December contract between strikes 7.50 and 10.00. With shares reading almost 3% lower at $11.06, the premiums paid for each end of the spread make it appear that this was a long position entered for a debit of 73 cents, representing the most he or she can lose on the strategy. The upshot of this trade is that the trader needs to see a decline below $9.27 – more than a dollar below the 52-week low of $10.39 set last October. At most, this trader will realize a profit of $1.77 if the lower strike goes unexercised.
SKS – Shares in department store chain Saks Incorporated slid 2.4% to $11.00, one day after same-store sales for the month of August showed a large-than expected decline. Positioning for more, albeit limited downside, one trader opted to play the pessimism with a sizable 2-by-1 put spread in the February contract between strikes 7.50 and 10. Here he or she sold two 7.50 puts against the purchase of a single 10.00 put, entering the trade for a debit of 60 cents and establishing an initial breakeven of $9.40. The maximum amount this trader can make on the trade is $1.90 – more than 3 times the money at risk – if Saks shares trade below that breakeven but keep well above the $7.50 line. The volume here sent overall options trading volume to 9.5 times the normal level.
RIMM – Volatility keeps moving higher in shares of Blackberry maker Research in Motion – composite implied volatility in RIM options has risen some 38% and now at 63.1% indicates the options market pricing in 45% additional potential risk than RIM shares have shown historically. With shares down 1% today at $106.37, interest remains brisk in RIM options, trading on a volume of more than 116,000 lots by midday. In one October play, a trader appears to have either sold a strangle between the 90/130 strikes for a $6.93 premium or possibly used a reverse collar, selling the put and buying the call to protect a short position in the underlying stock and taking a $2.45 credit. In the December contract, we saw a 3,000-lot short call spread between strikes 125 and 160 entered for a $5.14 credit, which the trader keeps if RIM shares remain below $125. All of these strategies benefit from the relative elevation of implied volatility – 65.3% versus 43.4% historic, up more than 10% from yesterday – which makes option premiums more expensive.
EWW – The price of the iShares MSCI Mexico Investable Market Index Fund showed a .41% downtick to $50.04 today, in continuation of a 3-month decline for the ETF that has seen it trim $13 from its share price. Components of the fund include a choice selection of major Mexican stocks, including Cemex SAB, America Movil, Wal-Mart de Mexico, Grupo Mexico SAB and Telefonos de Mexico. Today’s action involved a 4,000-lot strangle sold between strikes 49 and 52, the trader in this case taking a $2.65 credit in the expectation that the Mexican stock ETF will land within the range of those strike prices by October 17. This also suggests that the current downtrend for the fund will stop well short of the 52-week low of $46.97.
ALU – Option traders are likewise playing against a new breach of the lows in Alcatel-Lucent, whose shares have struggled despite energetic pledges by the company’s new CEO Ben Verwaayen that he can get the company back on track. With shares down .74% to $5.33 today, today’s option activity – which represented more than 27 times the normal level of interest paid to Alcatel-Lucent contracts – showed a trader write a 9,000-lot position in January 5.0 puts, taking a 45-cent premium per contract in the expectation that Alcatel-Lucent shares will be trading above $5 by mid-January. The stock bottomed out at $5.08 back on March 19, and this trader is counting on that low remaining intact. .
EWH – A starker directional view was staked today on shares of the iShares MSCI Hong Kong Index, which is .40% higher at $15.01, but still hovering just a sliver above its 52-week low. A 25,000-lot long position entered in March 15 puts at $1.45 per contract suggests that low will be broken by next spring. A look at overall open interest in the Hong Kong-indexed ETF shows puts and calls at a near-even split.
WLP – Shares in HMO WellPoint dropped 3.4% to $48.51, capping off a week that has seen media attention turn to the degree to which the company has boosted premiums in order to big-up profits in a climate of rising health-care costs and declining membership. Today its options volume swelled to 6.5 times the normal level, with puts outmoving calls by 3 to 1 as option traders vote against the sustainability of current share price levels. Besides brisk trade in front-month puts between strikes 45-55, fresh attention has turned to October 45 puts, which are being bought for $1.20 per contract. There’s also evidence to suggest call selling occurring in October 55 calls at 50 cents per contract – these also trading in excess of existing open interest. Implied volatility in Wellpoint options has stayed fairly flat this week, but at 37.4% is still slightly elevated against the 33.9% historic reading.
