Today’s tickers: CAT, VIX, CAT, STT, MGM, TMO & COST
CAT – Caterpillar Inc. – Investors have recently flocked to construction and engineering stocks driving up their market values following President-elect Obama’s December 6th radio address. The consensus view is that a ground-up rebuilding plan is likely to be written. Investors have been too hopeful too soon on this front and today a leading analyst turned his recommendation to “sell” on the world’s leading machinery maker, Caterpillar. In his opinion the company will earn less profits than earlier thought not just next year but also well in to 2010. Despite any potential from whatever stimulus package is drawn up, the impact of the credit crunch is likely to adversely harm profits, funding costs as well as extend credit losses at the company’s Caterpillar Financial arm. Option traders appeared to buy the February straddle on the company, which requires a move in the underlying share price away from a central point at which the option position is established by more than the overall premium. Investors bought calls and puts at the 45 strike shelling out a combined option premium of 10.65 to establish the trade. In order to win on the deal they now need to see Caterpillar’s share price either rally above $55.65 or decline beneath $34.35 at expiration. The current 52-week low for the shares stands at $31.95 while today Caterpillar is lower by 3.6% at $40.65.
VIX – CBOE VIX Index – Investors were rudely awoken Friday with a double-helping of bad news combining a fresh Wall Street scandal and Senate disapproval of assistance for automakers. Wall Street’s measure of fear, known as the VIX added a smidgeon to 56.89 but in a sign that some option traders expect still more volatility next week, they reached for call options expiring on Wednesday with a 75 strike price. The 30 cent premium reflects a 3% likelihood of the index reaching this level by expiration, but don’t forget that this premium would likely rally in the face of more strength in the VIX should the daily swings in the equity market ratchet up a notch.
ACN – Accenture Ltd. – Trading got underway with a bang in the options market today with a good old fashioned put spread in Accenture aimed at protecting an investor from losses should its share price continue to decline. Shares are off by 4.2% without a significant catalyst for the technology consultant at $26.39 and could well be aiming for a retest of the 52-week low at $25.05. An investor bought 10,000 December put options at the 25 strike paying an 80 cent premium while simultaneously selling the same amount of puts at the 20 strike at a premium of 20 cents. The net cost of 60 cents effectively reduces the cost of downside protection and raises the breakeven to a share price of $24.40 below which point the investor makes money penny-for-penny should shares decline. However, the gains reach a maximum at the lower strike of 20 when they stack up to 4.4 per contract.
STT – State Street Corp. – Option implied volatility rose around 11% at State Street as a 6.7% share price haircut to $36.30 sent option players in pursuit of defensive plays. Today’s activity is curious since there are currently around 93,000 option plays outstanding across the entire universe of available strike prices with 62,000 of those lodged in bullish call positions. Today’s volume of 15,590 contracts is heavily stacked in favor of bearish put positions with investors stacking up bearish bets aimed at profiting in the event of a sharp and imminent drop in the stock. Option traders bought puts reserving selling rights before next Friday’s expiration as low as 22.5. Volume of 1,100 contracts trading at around 45 cents compares to just 45 contracts of existing open interest. The December 30 strike traded at an average price of 1.31 where 2,500 puts traded, which is twice the number of bear positions investors already hold. But most appealing to investors today were January expiration puts at both 25 and 30 strikes where some 5,000 lots at each stacked up by late morning. Once again, these look like fresh positioning as a new name enters the bearish frame.
MGM – MGM Mirage – Heavy options volume in puts on Las Vegas casino and hotel operator, MGM doesn’t smack of anything untoward today, some investors might be pleased to hear. The chain recently ran into trouble with weakness in Vegas partygoers in the recession along with concerns over funding and expansion plans. Our market scanners have picked up sizeable volume at the December 5.0 strike puts while shares are trading at $10.05. It appears that the puts, which traded on volume of 9,650 contracts are emanating from a seller, who is likely to retain the nickel premium just as long as the stock doesn’t halve in value over the course of the next week.
TMO – Thermo Fisher Scientific Inc. – Implied volatility rose most at analytic and scientific instrument maker, Thermo Fisher today adding 17.6% to stand at 68.6%. One analyst that follows the company’s fortunes reduced his earnings forecast for the company, which counts universities, governments and laboratories as its customers. Some two-thirds of respondents to a channel-check survey indicated that their educational institutions were heading for budget cuts due to pressure on university endowments. In addition the results showed that currently capital equipment is a low priority. Shares at TMO slumped by 6.5% to $31.18 while option investors sought out put options expiring later this month at the 25 strike where they paid premiums of 32 cents to acquire 2,000 contracts whose price could rise if shares decline further.
COST – Costco Wholesale Corp. – Shares in the discount retailer rebounded after Thursday’s earnings prompted investors to ditch its shares. Costco shares are 3% higher at $53.64 while relatively heavy volume is confusing in the soon-to-expire puts on the company’s shares. We can see clearly that 10,000 puts were bought at the 47.5 strike at a 30 cent premium, but a mid-market price masks the investor’s intention with similar volume at the 50 strike which involved a 50 cent premium. The trading pattern indicates that the trades were not associated.
