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Insurer sees more covered calls in play on rosy comments from CEO

Today’s tickers: ACE, SPLS, YHOO, EMC, OI & GS

ACE – ACE Limited – Comments out of the CEO’s mouth on Wednesday helped push shares sharply higher at multi-line insurer Ace. Mr. Greenberg noted that the soft patch in his company’s business line was more than likely over and that the government bailout program had removed excess industry capacity. As such he’s insisting that business managers at the company simply say “no” to clients’ bargain requests. As shares rose, we noted some sizeable action on December calls, which were sold by a customer. Today we’re picking up more of the same this time at a higher strike price. With shares at $57.00 an investor is likely buying the stock and writing calls against it at the 65.0 strike at a premium of 1.30. Yesterday’s surge on heavy volume took shares from $47 to $58 and the 60 strike call was written. An optimistic buy-write strategy would make a total return on the combination of 16.3% if the share price reached the 65.0 strike price and confirmed Mr. Greenberg’s optimistic assessment of the business operating environment. Implied volatility is running at around 47% at that strike. If the share price does achieve its gain to where the calls were sold, the investor is prepared to deliver the stock to the call buyer.

SPLS – Staples Inc. – The price action of shares at Staples does look like a nice bottom formation and today’s confirmation from the company that it will meet analysts’ expectations have added to the rosy picture as shares jump 13.7% to $18.13. The company is also discussing the integration of its Dutch acquisition at a meeting in Boston today. We’re watching options in Staples as one of the most actively traded contracts today where morning volume surpassed 41,000 lots. That compares to existing open interest of 178, 684. Most actively traded today are calls at the December 20 line and puts at the 17.5 line where volume of 9,000 each side smacks of a strangle. Implied volatility has come in from 85% to 75% recently and today’s activity could indicate more volatility selling with the investor making the statement that shares will remain within the strangle range. If they do the investor gets to pocket the combined 3.0 premium. That gives the seller $3.00 above and below the range before being proved wrong on the strategy.

YHOO – Yahoo! Inc – Another actively traded option contract today is in search-engine, Yahoo! where there is plenty going on. Shares are 2.6% higher at $12.46 and investors appear to be diving into November and December calls at the 16.0 strike implying a further share price recovery of around 28%. We do note, however, that around one-third of the December volume was instigated by a seller at 94 cents, which casts doubt on the theory of sustained recovery. The volume at both series exceeds current open interest levels suggesting fresh interest here. In the January 12.5 line we’re watching volume increase lot for lot on both calls and puts indicating an investor taking a volatility position on the stock. The implied volatility reading on options contracts is higher by 16% at 105% today. Time and sales muddies the water, however, since the data indicates a long call and short put positions are being established.

EMC – EMC Corp. – Not exactly suspicious but more of a coincidence is the fact that we’re picking up unusual volume in EMC puts today following the filing by William Ackerman at Pershing Capital that he’s acquired 39.5 million shares in the company. Shares recently reached $8.45 and today have rebounded 4.7% to $11.02. This acquisition must have been within the past several days, but the filing with the SEC was made today. Meanwhile, a block of 37,500 puts was bought at a premium of 2.14 in the January 12.5 strike, meaning these puts are already in the money. Several thousand more contracts were traded at the strike. The existing open interest at the strike is almost 135,000 and this transaction might have nothing to do with Pershing whatsoever.

OI – Owens Illinois – Stronger than expected results from this glass-packaging manufacturer helped shares rebound 22% to $23.48. Our option market scanning tool has detected unusual volume at the November 30 strike calls where 10,226 calls have traded at 30 cents up from 10 cents prior to earnings yesterday. The volume exceeds investors’ current stance where investors hold rights to purchase 6.3 million shares in the company at $30.00 before November’s expiration.

GS– Goldman Sachs – What is the deal at Goldman exactly? Shares just can’t catch a sustainable bid even when the market has a good day. The continued ‘will they, won’t they?’ debate over its ability to leverage shareholder equity won’t go away. Perhaps it’s the current rise in debate on employee bonus payments that is leading to speculation over some kind of brain-drain from the company that’s not helping. Today its options are again among the most active on morning volume of 72,500 lots with a put/call ratio of 1.25 favoring bearish bets. There are two intriguing slugs of volume in today’s trade. On the call side in the November 110 calls volume of 10,000 lots almost matches the exisiting open interest here. On the day its premium is down by a quarter – since shares are 6.8% lower at $90.95. Elsewhere in the January contract at the 60 strike, volume of 5,000 lots has gone through at a premium over 50% higher than yesterday costing 6.70 today. During the recent stormy conditions put option open interest has built in this contract way down to the 10.0 strike as investors continue to make bearish postures.


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