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Monday, February 6, 2023

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Investors dispute Monsanto “Hold” assessment

Today’s tickers: MON, HPQ, WFC, MYGN, QCOM, XLI, C, WFR, DRYS, FXI, AMD & RMBS

MON Monsanto Company – The St. Louis-based provider of herbicides, seeds, and related biotechnology trait products used to improve farming productivity, experienced a 1.5% decrease in shares to $82.13. Despite the slight decline, a report from Standard & Poor’s this morning noted that the agriculture sector experienced its strongest year in 2008, and further, that “seed and agriculture technology companies stand to benefit” from the health of the farm economy. Monsanto was highlighted for its solid research and development efforts and its promising estimates for earnings through 2012. However, one analyst did report that shares are “fairly valued” at $84.00, prompting a ‘hold’ recommendation. MON popped onto our market scanners after one investor initiated a bull call spread in the May contract. The purchase of 7,500 calls at the 95 strike price for 2.30 was spread against the sale of 7,500 calls at the 105 strike for 55 cents apiece. The net cost of this strategy amounts to 1.75 and yields a maximum potential profit of 8.25 if shares can rally upwards to $105 by expiration. Shares would need to grow by 28% in the next 2 months in order for this optimist to succeed in capturing the maximum profit of 8.25 by expiration day.

HPQ Hewlett-Packard Co. – In contrast to the call-selling witnessed yesterday in the options world, today investors were keen on purchasing calls in the November contract as shares of HPQ rally 1% to $30.95. The world’s largest personal-computer maker received an “outperform” rating by RBC Capital Markets due to the company’s, “diverse revenue portfolio, recurring book of business, stronger margin profile and solid management team,” according to one report released today. While most of the activity occurred in the November contract, one investor was seen banking profits on the sale of 3,000 calls at the in-the-money April 27.5 strike price for a premium of 4.00. Moving ahead 7 months, investors splurged on 2,000 November 32.5 calls for 4.40 apiece. Meanwhile, 5,500 calls were purchased at the 35 strike price for 3.40 at the same time that 6,500 calls were picked up for 2.50 at the 37.5 strike price. Finally, the most optimistic traders looked to the November 40 strike where some 2,400 calls were coveted for a premium of 1.80 per contract. Investors are clearly hoping for HPQ to live up to its new ‘outperform’ title and for its shares to post significant gains as we near November expiration toward the conclusion of 2009.

WFC Wells Fargo & Co. – Shares have rallied 6% to $16.45 amid gains observed at many of the large TARP-recipient banks. Interesting options activity was seen in the April contract by both slightly pessimistic as well as bullish investors today. At the April 10 strike price about 5,300 puts were sold for 32 cents each, indicating that investors do not see the need for protection at strikes that are so far out-of-the-money. Solidifying some bullishness on the bank was the purchase of 6,400 calls at the April 20 strike price for 97 cents per contract. Shares would need to rally significantly by 27% from the current price in order to reach the breakeven point at $20.97 by expiration. The plain-vanilla optimism observed by the put-sales and call-purchases occurred amongst one trade, which caught our eye. It appears that one bearish investor has established a sold strangle by shedding 7,500 calls at the April 19 strike for 1.25 as well as 7,500 puts at the 14 strike price for 1.17. We believe that the gross premium of 2.42 on the sale was utilized to partially offset the cost of 10,000 puts which were purchased at the April 17.5 strike for 2.64 apiece. The net cost of the puts amounts to 22 cents and provides downside protection for this investor should shares of WFC experience downward movement by expiration.

MYGN Myriad Genetics Inc. – The biotechnology company has experienced a 7% rally in its shares to $87.11 after the American College of Obstetricians and Gynecologists announced its recommendation that doctors “routinely evaluate whether a patient is at risk of carrying a genetic mutation of the BRCA1 or BRCA2 gene” as carriers of the mutation have a much higher risk of developing breast or ovarian cancer. Myriad’s BRACAnalysis is marketed as a genetic screening test for the mutations described. Option traders swallowed this news and were seen getting bullish on MYGN. At the April 90 strike price about 1,200 calls were picked up for 2.52, while the April 100 strike saw 1,300 calls coveted for 1.24 apiece. Optimism spread to the May contract where 1,300 calls were purchased at the 90 strike price at a hefty 5.34 each. Perhaps in addition to aiding MYGN’s bottom line, today’s announcement will spur increased screenings to identify individuals with inherited risk so that steps can then be taken to reduce that person’s risk of developing breast and/or ovarian cancer.

QCOM Qualcomm Inc. – Shares are off slightly by less than 1% to $37.77. QCOM shuffled onto our ‘most active by options volume’ market scanner after one investor purchased a strangle in the January 2010 contract. Looking for a rise in option implied volatility, the trader purchase 12,000 puts at the January 35 strike price for 4.50 while also picking up 12,000 calls at the 50 strike for 2.00 apiece. The strangle cost him a total of 6.50 and sets breakeven points at $56.50 on the upside and at $28.50 on the downside. This investor is either hoping for shares to swing through either of the breakeven points where profits begin to amass, or is looking for implied volatility to rise. Should volatility spike higher from the current reading at 45% this investor will see premiums grow on the strangle and allow him to encounter the opportunity to take profits on the resale of the strategy before expiration next year. We note in our charts that since Qualcomm shares broke above $37.75 recently – the highest price since November – options implied volatility appears to be gradually increasing. This investor could be on to something.

XLI Industrial Select Sector SPDR – One lucky investor who pinpointed the bottom for stocks to within 24 hours appears to have banked gains and rolled the dice again using the basket of stocks representing the industrial sector. On March 5, we recall this investor stepping up late in the day to buy some 250,000 call options at the 18.0 strike when shares in the fund were changing hands at $15.67. The buyer paid a 30 cent premium representing a $7.5 million premium. The next day marked the bottom for stocks and the XLI traded down to around $15.14 before embarking on a largely uninterrupted rally as high as $19.25 today. The well-timed transaction has awoken the option trader who today closed the long call position at the 18 strike in exchange for the same amount of April call options at the 20 strike. Those calls were traded at 1.50 today representing a $37.5 million premium netting the investor a handsome $30 million gain in two weeks. At the same time the investor is staking $11.25 million of those gains on a wager that the rebound for stocks will keep going. In order to ensure he doesn’t lose a penny of that stake, shares in the industrial SPDR would need to rally from the current $19.00 to $20.45 or 7.6% from here. Readers may recall that at the same time another investor snapped up 170,000 calls on the utilities ETF (XLU) when its shares were trading 10% lower than today.

C Citigroup, Inc. – In contrast to the bullish picture painted by options investors yesterday, today’s playing field is populated with put-buyers even as shares add modest gains of 2% to stand at $3.07. At the in-the-money May 3.0 strike price investors shed 10,000 calls for a premium of 55 cents and scooped up 11,000 puts at a price of 74 cents per contract. One trade in May that diverged from the overall pattern involved a sold straddle at the May 5.0 strike where 5,000 calls and 5,000 puts sold for a gross premium of 2.52. Given that shares seem to have encountered some resistance at the $3.00 level since it first rallied above it on March 18, this straddle-seller must be looking perhaps a gentler rally in the share price. Given his hopes that shares will gravitate towards $5.00 by expiration – in which case he retains the full 2.52 premium –, the investor is selling volatility and looking for it to decline in the event that Citi’s share price rises. Maybe this trader feels that the rock has been lifted from the bank’s chest, allowing it to breathe a bit easier now that fears of nationalization have somewhat subsided. Aside from that tangential trade, the June 2.5 strike price saw 28,000 in-the-money calls sell for 87 cents each while the 2.5 puts saw investors pick up 28,000 for 64 cents apiece. The 5.0 strike price in the June contract had 12,500 in-the-money puts purchased for 2.57 each, but only 7,000 calls were sold by investors at that strike. The rest of the call volume of 11,000 contracts looks to have been purchased for 27 cents each. Perhaps the relatively inexpensive calls have attracted bullish investors who are looking for shares to rise by about 72% to the breakeven point at $5.27 by expiration.

WFR MEMC Electronic Materials, Inc. – Shares of the global manufacturer and designer of wafer technology has rallied strongly by 11% to $17.86 amid the remote whisperings of a possible takeover of the company. Investors wasted no time piling into calls in the April contract where over 7,400 were purchased at the 20 strike price for a growing premium of 63 cents. Those calls started the day trading for 20 cents and have changed hands at 80 cents by late morning trade. More optimistic traders populated the April 22.5 strike price and bought over 1,200 calls for 24 cents apiece. These investors are hoping for upward price movement to continue and increase by some 27% to the breakeven share price on the trade at $22.74 by expiration at the end of the month.

DRYS DryShips, Inc. – The wind, which had finally billowed the sails of DRYS and started shares moving in the right direction has reversed course along with its share price, currently off by over 12.5% to $4.82. The negative movement can be attributed to the drybulk carrier’s $1.02 billion fourth quarter loss versus profits for DRYS from the previous year on 6.6% lower revenue. The Greek shipping company is heavily burdened by massive amounts of debt, although it continues to negotiate with its lenders. Option investors favored calls 2-to-1 over puts today but the majority of contracts were sold. At the April 5.0 strike price traders shed more than 2,300 call options for 71 cents. Meanwhile, the April 6.0 strike had 2,000 calls sell for 40 cents apiece and the 7.0 strike witnessed some 2,400 calls sold for 17 cents each. Perhaps investors are banking gains, pessimistic about the company’s ability to “set sail” any time soon.

FXI iShares FTSE/Xinhua China 25 – Shares of the ETF have rallied 1.5% to stand at 28.97. FXI edged onto our ‘most active by options volume’ market scanner after one optimistic investor initiated a ratio call spread in the April contract. At the April 28 strike price 15,000 in-the-money calls were picked up for 2.15 each while at the April 31 strike 30,000 calls were sold for a premium of 76 cents. The net cost of the spread amounts to 63 cents (1*2.15 – 2*0.76 = 0.63 cents). Thus, this investor stands to make a maximum profit of 2.37 – beginning at the breakeven share price of $28.63 – if shares can rally to $31.00 by expiration. By selling twice as many calls at the upper strike this trader significantly reduced the cost of getting long the contracts at the lower strike. The risk inherent in the trade is that he is now short twice as many calls at the 31 strike price and is therefore exposed to losses if shares should rally too hard. Above the upper boundary the investor would see losses erode in the event that the share price raced ahead to $33.37.

AMD Advanced Micro Devices, Inc. – The global semiconductor company is flying high today with current gains of 8% to $3.40 as positive economic news regarding the demand for capital-goods lifts the broader tech sector. Option investors drove call volume upwards to 20,000 at the April 4.0 strike price, an amount that represents more than twice the existing open interest at that strike. Over 13,500 lots were purchased at the 4.0 strike for an average price of 21 cents apiece. Bullish investors are hoping to see shares continue to rise by 24% from the current price in order to breach the breakeven point at $4.21 by expiration. Option implied volatility has risen from the low for today of 104% to as high as 115%, although currently volatility has come off slightly to 113%.

RMBS Rambus, Inc. – Amid gains enjoyed by the broader tech sector, Rambus has added approximately 5% to its share price to arrive at $10.31. The company develops, designs, and licenses chip interface technologies necessary for just about all digital electronics products. Option traders took the positive energy surrounding tech today and channeled it into call buying in the near-term April contract. At the April 11 strike price some 2,000 calls were picked up for 89 cents apiece, but the April 12 strike attracted the most volume with more than 5,400 calls purchased for 59 cents each. Investors bought calls as high up as the April 15 strike where more than 1,100 cost 21 cents per contract. Thus, the overall picture seen from option trades was positive, although some investors are hoping for incredible gains of about 48% from the current price to arrive at the breakeven of $15.21 by expiration.

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