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Tuesday, February 27, 2024

Goldman Sachs Bulls and Bears Collide

Today’s tickers: GS, WFT, FITB, NITE, USU, KFT, UNP, EBAY, SBUX & HOTT

GS – Goldman Sachs Group, Inc. – Near-term bears and bulls crossed paths in the February contract on global investment banking firm, Goldman Sachs Group, today. The past 48 hours have stirred up a plethora of concerning news for investors, most recently, President Obama’s call to limit the size and trading activity of large financial institutions, which pummeled the financial sector like a ton of bricks, dragging equities down across the board. Additionally, markets are still smarting from China’s reining in of monetary policy, which sent the US dollar up over the past couple of days. The VIX jumped yesterday and continues higher during the current session. The fear-gauge increased 19.67% today to an intraday high of 21.90 countering the declines in the S&P 500. Investors watched Goldman’s shares fall 4% to $161.07 this afternoon even though the firm earned $8.20 per share in the fourth-quarter, which blew right past average estimates of $5.19 a share. Frenzied options trading exploded on the financial institution with roughly 358,000 contracts exchanged on the stock by 2:50 pm (EDT). Bearish bets were plentiful, although there is also evidence of contrarian bullish plays, as well. Put options were purchased as low as the February $145 strike where 3,500 contracts were purchased for an average premium of $1.46 per contract. Shares are still 12.20% greater at the current level than the breakeven price on the puts at $143.54. The heaviest put trading occurred at the nearest to-the-money February $160 strike where more than 23,000 contracts changed hands. At least 8,100 of the contracts were purchased for $4.12 per contract. Contrarian players sold 2,300 puts at the February $135 strike to pocket an average premium of $0.93 each. Put sellers retain the full premium as long as Goldman’s shares trade above $135.00 through expiration next month. Some investors are looking right through the negative news and buying call options. Most notable is the 7,200 calls purchased at the February $165 strike for an average premium of $4.52 each. The stock must rebound back to $169.52 in order for call buyers to breakeven on their purchases. Other traders threw in the towel at the higher February $170 strike by selling at least 8,900 calls to receive an average premium of $3.02 per contract. Two-way trading traffic in GS options and investor uncertainty has lifted option implied volatility to an intraday high of 35.91%, up from an opening reading of 25.35%.

WFT – Weatherford International Ltd. – Bulls stampeded the May contract on the provider of equipment and services used for drilling oil and natural gas wells. Shares are up 0.50% in late afternoon trading to stand at $18.64 despite the overall downturn taken by the market in today’s session. It looks like traders expect WFT’s shares to stand significantly higher by expiration in May, judging by the increase in demand for out-of-the-money call options in that contract. Investors purchased approximately 25,000 calls at the May $25 strike for an average premium of $0.37 per contract. Traders long the calls are positioning to accumulate profits if shares of Weatherford International surge 36% from the current price to surpass the effective breakeven point at $25.37 by expiration in four months time. The breakeven price described above is higher than the current 52-week high on WFT of $23.75 attained back on June 11, 2009.

FITB – Fifth Third Bancorp – Ohio-based bank holding company, Fifth Third Bancorp, did not buckle along with the broader market today. FITB’s shares traded up 9.75% this afternoon to $12.42, a new 52-week high for the stock. Shares jumped after the bank revealed that losses decreased in the fourth quarter. The average expectation for earnings centered at a loss of $0.31 per share, but Fifth Third beat estimates by posting a narrower loss of $0.20 a share. Bullish traders attacked the March $14 strike, buying approximately 5,000 calls for an average premium of $0.29 per contract. Shares must rally at least 15% in order for call buyers to profit above the breakeven price of $14.29 by expiration in March.

NITE – Knight Capital Group Inc. – The electronic trading services provider that saw its share price slip from $23 to $14 in the last quarter of 2009 announced above earnings above expectations before the market opened today, helping lift its share by 9% to $16.44 and to the highest since mid-November. Uncertainty surrounding the share price came screaming off post data with implied volatility sliding from 36% to 22%. Options activity was finely focused at several contract months but at the same $15 strike. It appears that several investors following the fortunes of the company sold put options expiring in February, March and April perhaps taking the view that an earnings beat may draw the line under a period of undervaluation for the stock. We can see call buying across the calendar adding to established open interest. Today’s buying helped send premiums at the February $15 strike 115% higher to $1.50 per contract, while March and April calls were up between 70-80%.

USU – Usec Inc. – Uranium supplier to commercial nuclear power companies, Usec has struggled in the commodity bull market to find its feet. Today its shares are 9 cents lower at $3.88 having reached almost $4.25 so far this year. The stock remains well above its November low at $3.50 and the chart shows March and July support comes in at $3.25. The options volume to us indicates gathering confidence in the company’s prospects. One investor combined a stock position at $3.98 with an equivalent amount of April put protection paying 55 cents to protect against an adverse movement beneath $3.45. Another appears to have spent 45 cents to get long April call options that would break even at $4.45 should the shares jump by 15% from today’s price.

KFT – Kraft Foods Inc. – Shares of the U.S. food company are trading approximately 2% lower today to $28.26, but options activity on the stock suggests some investors anticipate a sharp rebound in the value of the underlying by expiration in March. Kraft shareholder and billionaire Warren Buffet earlier indicated his mild irritation with management’s though process in a recent proxy statement, but cautioned that he’s also made mistakes. At this juncture it doesn’t sound like Buffet will be dumping any shares and today’s movement is likely a function of a weak broad market. Perhaps bullish traders are submitting a vote of confidence on KFT now that Hershey Co. has abandoned plans to bid for Cadbury Plc, and the British chocolatier has accepted Kraft’s $19.3 billion offer. Kraft optimists purchased roughly 24,000 call options at the March $30 strike, paying an average premium of $0.35 per contract, to position for a near-term rally. Traders holding the call options amass profits if shares of the underlying increase 7.40% over the current price to surpass the effective breakeven point at $30.35 by expiration day. Kraft’s shares must supersede the current 52-week high on the stock of $30.10 – attained back on January 13, 2010 – by a minimum of $0.25 for bullish traders to at least break even on the calls. To achieve that investors must be confident that the Cadbury acquisition will be sufficiently earnings accretive to justify a higher valuation.

UNP – Union Pacific Corp. – Mixed sentiment by option traders populating rail transportation services firm, Union Pacific Corp., is apparent in the May contract. The U.S. railroad toting the biggest locomotive fleet posted better-than-expected fourth-quarter earnings of $1.08 a share, which beat average analyst estimates of $1.04 per share. UNP’s shares surged 3.90% in earlier trading to an intraday high of $66.19. Bullish individuals sold 2,000 puts at the May $50 strike to take in an average premium of $0.35 per contract. Put-sellers retain the full $0.35 premium assuming no catastrophic train wrecks befall UNP’s shares by expiration in four months. One cautious option trader initiated a three-legged combination play, wherein the sale of out-of-the-money calls serve to partially finance the purchase of a bearish put spread. The investor sold 7,500 calls at the May $75 strike for a premium of $0.70 apiece. On the put side, 7,500 puts were picked up at the May $65 strike for $4.40 each and spread against the sale of 7,500 puts at the lower May $60 strike for about $2.20 in premium apiece. The net cost of the transaction amounts to $1.50 per contract. The trade is likely the work of an investor holding a long position in the underlying shares. The short call position, in such a case, is of little concern because the trader would probably be glad to have shares called from him given a 13.30% rally from today’s high of $66.19 up to $75.00. Additionally, the put spread serves as downside protection in case shares slip beneath the breakeven price of $63.50 ahead of expiration.

EBAY – eBay, Inc. – Shares of the e-marketplace are soaring 8.25% higher this morning to $24.06 on news the firm posted better-than-expected fourth-quarter earnings of $0.44 per share, which exceeded average analyst expectations by about $0.04 a share. Option traders burst onto the trading scene, exchanging more than 51,000 contracts on the EBAY in the first 40 minutes of the trading session. Investors are trading call options two times for every put option in play thus far today. Option implied volatility plummeted 30.44% to 27.60% following earnings.

SBUX – Starbucks Corp. – The Tazo tea and Frappuccino maker’s shares are up nearly 4% to a new 52-week high of $24.17 in early morning trading following earnings released after Wednesday’s closing bell. The coffee-house chain posted fourth-quarter earnings per share of $0.32, which beat average estimates by $0.04 a share. Option implied volatility fell sharply by 28.23% to 26.88% today as earnings news settled into the marketplace. Investors traded more than 27,700 contracts on the stock as of 10:20 am (EDT). Call options are the clear favorite today with more than 2 lots traded to each single put option on the stock.

HOTT – Hot Topic, Inc. – Option volume on mall and web-based specialty retailer, Hot Topic, has exceeded existing open interest on the stock of 3,347 lots as investors exchanged more than 5,000 contracts by 10:30 am (EDT). HOTT’s shares are up 5% to $5.88. It looks like two-way trading traffic is building on the call side in the May contract. Roughly 2,200 calls changed hands at the now in-the-money May $5.0 strike, while the higher May $7.5 strike had 2,600 lots traded on paltry open interest of just 230 contracts. Option implied volatility on Hot Topic is up 13.40% over yesterday’s closing reading of 50.27% to an intraday high of 57.01%.


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