Today’s tickers: ADBE, LIZ, HRB, IR, XME, MHS, ESRX, XLF, LDK, NOV, VIX
ADBE – Late-day option trading was All About Adobe, minutes before the maker of Acrobat software was due to report quarterly earnings after the market close. While Adobe shares were down 2.7% heading into the close, call volume in Adobe soared to its highest level in more than 6 months, and the more than 102,600 option contracts in play rubbed shoulders with some 36% of its total open interest. With this afternoon’s 36.8% implied volatility reading representing about a 12% gap above the historic reading, traders are looking for an even bigger price move once the numbers are out. They’re doing so by buying heavily into the December 40/42.50 strangle, on a volume more than twice the open interest on the call and put sides. The position costs a combined premium of $1.60 in the expectation that Adobe shares will show either an upside move past $44.10 or a break below $38.40 in the wake of the report. Action in the January contract showed an inclination to sell calls at strikes of 40 and up to 47.50. Puts at the 37.50 strike also sold heavily, suggesting that some traders may be selling strangles in anticipation of a return to rangebound price action with the rollover into the January contract.
LIZ – This weekend, the New York Times business section cited a MasterCard Advisors survey which found that sales of women’s clothing, one of the retail ramparts of the peak holiday shopping season, have declined nearly 6% compared to the same time last year. The decline in women’s clothing sales, particularly in the mass-market segment, was deemed worrisome and surprising in the article, nothing that spending by women is “closely watched barometer of the (fashion) industry’s health.” With that in mind, we were particularly interested to witness today’s 19% uptick in implied volatility in fashion label Liz Claiborne, whose shares declined 1.7% to set a new 52-week low at $21.71, despite the high-profile recruitment of fashion doyen Tim Gunn (he of “Project Runway” renomme) as the label’s chief creative director. The gain in implied vol was sizable enough to make Liz Claiborne one of the day’s top implied volatility gainers according to our scanners, and while the option volume of 1,500 lots was modest in absolute terms, we were struck by the concentration of volume in fresh long positions in January 22.50 puts. This long put position, which costs about $1.65 today, implies a dip to $20.85 by January’s expiry just to break even – that’s nearly another $1 drop from the current lows, and this from a share that’s already lost more than 50% of its value in 2007.
HRB – Option traders are similarly dour about the share price prospects for the country’s largest tax preparer, H&R Block, which last week reported that it would stomach a $74.8 million charge following the company’s failure to divest its subprime mortgage division, Option One Mortgage Corp. With an earnings report conference call due to take place today at 4:15, implied volatility surged another 20.7% to 69.0%, making it one of the day’s top implied volatility gainers and standing at 1.5 times the historic reading. Option traders have loaded up defensively, with 6 times as many puts in play as calls, perhaps divining that there’s more bad news where the last came from and resolutely buying December puts at strikes of 15 and 17.50. Shares are currently down some 2% at $19.86, within about 30 cents of the 52-week low. Open interest confirms the “bleak house” consensus among option traders, with two and a half open put positions for every call.
IR – This morning’s news that diversified industrial company Ingersoll-Rand will acquire air conditioner maker Trane in a $10 billion transaction designed to expand its footprint in the climate control segment confirmed a flurry of bullish option activity and a massive upswell in implied volatility that we observed in Trane late on Friday afternoon. Ingersoll Rand shares closed 11.5% lower at $43.48, and its options traded at about 6 times the average volume, with about 12,000 lots in play. A huge chunk of this volume was tied up in January 55 calls, which sold off as the value of the position deteriorated 66%. A similar level of activity was observed in puts at the 42.50 strike, which could imply traders looking to lock in a 42.50 selling price for Ingersoll-Rand shares as the company digests its acquisition target. Implied volatility remains elevated at 35.5% – that’s a 22% premium on the historic reading and a 21.3% increase from Friday, making it one of the day’s top implied volatility gainers, and suggesting that the full implications of the Trane acquisition haven’t yet been fully factored into Ingersoll-Rand’s current share price, at least in the view of option traders.
XME – SPDR S&P Metals & Mining ETF saw its share price decline 3% to stand at $65.82 ahead of the close. Options volume of 21,000 compared to existing open interest of 78,448 contracts meant that the options activity showed up within our market scanner. The activity was focused in two specific areas, both in the March contract. The vast majority of the existing open interest exists on the put side of this contract at the 50 strike, where the option delta is 9%, and the 70 strike, where the 53% delta already indicates that options are in-the-money. The activity piques our curiosity. First of all the 70 strike puts have now traded 10,000 volume for the second day in a row and it appears that an investor is buying puts and so taking protective action against global slowdown. The ETF holds shares in material companies such as Freeport McMoRan and Alcoa, along with energy companies including Nucor and Consol Energy. A glance at the charts shows us that this ETF shows the share price in a healthy uptrend and its shares just traded an all-time peak above $70 before starting to recoil. The second piece of action was at the much lower strike 50 line, where the delta indicates a less than one-in-ten chance that shares will fall that far by expiration. It appears that a seller is closing an old position. Given the relatively light open interest and the similar trade size here, we’d conclude that this is one investor rolling out of one position and into a more realistic strike given the fact that materials and energy-type companies have remained relatively unharmed despite the recent credit crisis.
MHS – Medco Health Solutions – Elsewhere, we were interested to observe sizable relative gains in two separate companies in the pharmacy benefits management space – an obscurish-sounding market segment that has nonetheless garnered a fair share of positive analyst attention in recent weeks as a solid defensive play. Medco, the company behind the country’s biggest mail-order pharmacy, hit our market scanners this morning thanks to an increase in trading volume to 5.5 times the daily average. This occurred as its shares traded 2.6% lower at $98.50. Today’s uptick in volume appeared tied to deep-in-the-money call spread activity in the January contract, where about 11,000 lots were bought in calls at the 75 strike at a price of $25 apiece, against the sale of 10,000 lots at the 90 strike, which commanded premiums up about 10.50. Traders oftentimes turn to deep-in-the-money calls like this as a proxy for the actual stock, which in the case of Medco has enjoyed an almost interrupted bull run for the entirety of 2007 – even during the worst of the Indian Summer equity-market selloffs. Its share price started the year trading at around the $53 level and is now just under $100 as open interest shows bullish calls outnumbering bearish puts by a factor of around 1.4.
ESRX – Express Scripts – We observed a similar uptick in volume from another pharmacy benefits manager, St. Louis-based Express Scripts, whose options traded at 4.6 times the average rate against a marginal .61% gain for its share price to $71.14. Calls outmoved puts by nearly 15 to 1, with long positions in the December 65 calls trading within the bounds of existing open interest, but fresh short positions in calls at the January 75 strike and February 65 strike implying trader confidence in a decline below those levels into the New Year.
XLF – Financial Select Sector SPDR – Shares in the financial sector ETF reversed early gains to close 1% lower at $29.05 – having traded in positive territory for much of the early session despite a new spate of bank downgrades by analysts at Citigroup. With more than 190,000 lots in play the XLF was one of the day’s most active option families according to our market scanners, with twice as many puts in play as calls. Puts at the December 29 strike appeared to sell off heavily at bargain premiums of 7.5%, while January puts at the 28 strike traded to the middle of the market on slightly higher premiums of 92 cents. A look at the delta on this put shows current premiums reflecting a 30% probability that this position will land profitably by January’s expiry.
LDK – LDK Solar –A repeat performer in our option volume scanners in recent weeks, China-based LDK saw a massive upsurge in volume this morning after the maker of multicrystalline solar wafers confirmed that an internal investigation of its silicon inventory reports had found no discrepancies or financial irregularities as alleged by its former financial controller. LDK is due to report Q3 earnings on Wednesday. Today its shares traded at a 19% premium from Friday’s levels at $68.00, with some 72,000 option contracts in play – equivalent to more than a third of its total open interest. Twice as many calls are moving as puts this morning, but these are trading in comparable measure to buyers and sellers, primarily in the December contract at strikes of 60, 70 and 80.
NOV – National Oilwell Varco – One of today’s M&A movers, shares in the buyer of Grant Prideco are trading 8.6% lower this afternoon at $70.69 as option traders put some 44,000 lots in play, making it one of the most active tickers to appear on our market scanners this afternoon. Of note here is fresh buying in December puts at strikes of 65 and 70, suggesting continued downside for National Oilwell Varco’s share price in the waning days of the December contract. Calls at the December 75 strike traded to buyers and sellers. Calls outweigh puts in the open interest stakes by a factor of 1.7.
VIX – CBOE Volatility Index – We continue to notice that market volatility remains timid despite a hefty slip in the S&P 500 index Monday. The global backdrop for stocks appears weak and there is no shortage of negative sentiment weighing on traders’ minds as they step into the office. The Nikkei led overnight Asian declines with a plus-2% slump, while U.S. traded emerging market ETFs are amongst Monday’s biggest losers. Brazil (EWZ) is lower by 3.4%, Taiwan (EWT), Australia (EWA) and Hong Kong (EWH) are all down 3.4%, while China (FXI) is also down 2.7%. Yet we note that the problematic Select Sector SPDR Financial (XLF) is now higher on the day at $29.47. To us this is the heart of the matter and only when financial stocks recover, will the broad market be able to do so also. Perhaps today’s light gain in the VIX is also explained by this fact. In the December contract, it appears that a 22.5 straddle might be in play in the VIX where gross premium is 1.6. In order for a seller of volatility to retain that entire premium the VIX index must expire within a range of 20.9 and 24.10 by Friday’s expiration. With the turnaround in financials today, Goldman’s earnings Tuesday and a clearer take on the success of the initial Fed auction of $20 billion aimed at clearing out the logjam in the money market, the potential for a market rally is possibly larger than the threat to a weaker stock market and hence an upside for volatility, which in recent weeks has failed to catch fire on broad market declines. Elsewhere, heaviest options activity is apparent in the January 30 calls where 1,700 contracts have traded. In the February calls at the 22.5 strike around 8,000 lots have traded.
