Today’s tickers: AFFX, CPHD, ABAX, WM, MER, XLF, C, CROX, JNPR, GDX, TOL, UHS, COLM, TEN
AFFX, CPHD – Medical instrument makers took a wallop in the market today after producers Affymetrix and Cepheid both missed earnings and cut guidance due to slowing drug industry sales. Shares in Cepheid declined 35% to $17.65 as we recorded a 9-fold increase in option trading volume that showed two-way traffic in August 25 puts that gained 438% in value overnight (no surprise to see traders take profits in those positions). The September 15 puts were buyers at 90 cents a pop as traders did not seek to position against the fairly lackluster guidance presented by these companies. Shares in fellow culprit Affymetrix lost 25.7% of their value to read $7.72 as we recorded an increase in options trading volume to more than 10 times the normal level, and puts outtraded calls by 3 to 1. Interestingly, however, this was due in large part to a 5,000-lot trade at the January 7.50 strike that seems to have been initiated by a seller taking in a $1.15 premium. This could imply some stabilization for Affymetrix by the first of the year. Implied volatility at 59.5% remains sharply elevated above the 49.2% historic reading, which suggests the options market doesn’t believe the earnings move has been fully articulated in the share price, and we could either see continued downside or a normalization above current levels over the next 30 days.
ABAX– Shares in fellow instrument maker Abaxis lost 13% to $20.15 after it reported disappointing Q2 earnings yesterday. As we observed with Affymetrix, the implied volatility reading in Abaxis remains highly elevated above the historic reading, which clues us in to the fact that the options market is looking for more movement from this stock even with the earnings fully disclosed, and that this expectation is being factored into options to lock in specific prices on the stock. Implied volatility has only come off about 8% from its pre-earnings high of 69.8% to read 63.7% and remains head and shoulders above the historic reading of 46.9%. An increase in options trading volume to 18 times the normal level showed traders positioning in November 20 calls, which traded to the middle of the market for $2.75 and could indicate an expectation of movement above current levels by November. The current share price represents a 50% discount from its 52-week high. Options traders hold more than twice as many call positions as puts in Abaxis, a proportion that has remained consistent since about mid-May.
WM– Shares in Washington Mutual took back some losses this afternoon to read 1% lower at $3.99 after the company issued a statement about its capital adequacy to CNBC. The price of credit default protection on Washington Mutual had risen earlier today, sparking a run among option traders for put protection. Implied volatility on all Washington Mutual options remains high at 194.6% against a historic reading of 184.0% and the price of the front-month straddle suggests a range of about $1.38 to the upside or the downside (about one-third of the current share price) is likely between now and August 15. The trading action appears fairly hodge podge, with two-way traffic in 3 and 4 puts in August, extending into the September contract, where it looks like some traders may also be using that 4-strike put in conjunction with the 5-strike call for volatility strangles. This is a position that carries with it a $1.91 premium and covers the trader in the event of a break below $2.09 or a recovery above $6.91.
MER– Merrill Lynch shares shed 6% of their value to read $27.30 today despite a formal disavowal by Singapore’s state-owned investment company Temasek of reports that it had sold its stake in the US brokerage. Implied volatility in all Merrill Lynch options reads 106% against a historic reading of 94.1% – that’s an increase of nearly 75% in the past 3 days and suggests that option traders are looking for more potential volatility in the stock over the next 30 days that it has shown historically. Most active today have been the August 25 calls, which traded on elevated implied volatility (121%) and at higher premiums of about $2.13, suggesting pressure to buy at these strikes. A look at time and sales shows that relatively more of these puts were bought than sold, as the price of this strike reflects about a 1-in-3 chance of Merrill breaking below $25 by August 15.
XLF– Early in the session today it looked as though financial issues might dust off at bit after yesterday’s ruinous rout, but most big bank stocks have reversed early gains and are now resolutely in the red as the market’s “dust bowl pessimism” continues to stick to the shoes of these stocks. Even during the gains of the early session, option traders seemed to show a knowing inclination to put spreads, continuing a trend that began Wednesday with the prolific spread activity in Wells Fargo, and continued throughout yesterday with action in Bank of America and Citigroup. Shares in the financial sector ETF are showing a downtick of 1.3% to $20.68 at present dispatch, as large block trades have driven the volume up to nearly 950,000 active by day’s end. We continue to see heavy buying pressure in August 18 puts on volume of more than 82,000 lots at this strike. Block trade action in the August 17 puts has continued throughout the morning, with a large raft of these puts apparently selling to the bid after some early buying pressure: the 23-cent premium on that position reflecting about a 10% likelihood of occurring. Elsewhere we saw fresh volume enter the middle of the market at the December 21 put line at $2.55 per contract. The takeaway here is that option traders appear readily positioned for a further unwind in the financials notwithstanding some intermittent catches of breath to the upside.
C– Citigroup shares changed course after a Deutsche Bank analyst portended more downside to come for U.S. and European banks en masse and are down 2% at $18.69 at present dispatch. Highlights from the 265,000-plus active volume in Citi options include a 25,000-lot put spread in the December contract between the 12.50 and 17.50 strikes that was entered this morning. This looks like a regular long put spread, implying a $1.50 debit in a play that would see at least another 17% downside for Citi shares and a possible break of the 52-week low by December 19, not dropping below $12.50. At present, the options market sees about a 1-in-5 chance of a drop below $15, which would put Citi within sights of the $14.01 52-week low.
CROX– Yesterday’s late-day profit warning from Crocs fanned the usual fears among trigger-happy options traders that the company’s squishy colorful clogs are a fad with a limited shelf life. Shares have collapsed 44% to $5.00, bringing with it a rise in implied volatility of more than 18%. Options are on volume equivalent to 20% of its open interest, divided evenly between calls and puts, with fresh volume on both sides of the August 5 call/put line. Buying pressure is heavier on the put side, extending into the same strike in September at $1.10 per contract.
JNPR– Better-than-expected earnings out of Juniper Networks sent shares nearly 20% higher to $26.95 as we observe an increase in options trading volume to 6.5 times the normal level. Brisk volume in August calls, especially at the 23 and 25 strikes, was observed today as premiums on those positions are up 223-350% on the session, but earlier today we also observed heavy buying pressure at the August 24 line representing nearly all the open interest at that strike. This could be a play on a swift correction in the price following today’s rally, or the closing of a short position on the puts.
GDX– Shares in the Market Vectors Gold Miners Fund rose .84% to $44.37 today as its 19,000-strong volume qualified the fund for our scan of top-50 volume movers. The action here involved a 6,400 lot diagonal calendar call spread, where it looks like the trader sold in-the-money calls at the 43 strike for $3.50 to fund the purchase of December 48 calls for $3.60. The trader is likely taking advantage of the more rapid time decay and perceived overpricing of the September 43 call relative to the December 48 and looks to close the trade at an advantageous price on both ends.
TOL– Stronger-than-expected new home sales data and a marginal improvement in the Michigan Survey of Consumer Confidence patched through to upside action for most homebuilder stocks. Shares in Toll Brothers rose .99% to $19.47, putting the company about $1 off the average of its high and low prices of the past 52 weeks. An increase in option trading volume to triple the normal level appeared in the form of a multi-leg trade in the December contract, where it appears based on the order flow that a trader may have sold 10,000 lots of December 15 puts at $1.10 in order to fund a long 5,000-lot collar between the 20 and 30 strikes, which was done for a net debit of $2.70. Using the December 15 puts as a funding mechanism would have brought that debit down to 50 cents. The collar strategy itself is implicitly bullish in that it’s done in tandem with an underlying position on the stock (i.e., the trader has to be confident enough in the company’s viability to want to own the stock), albeit protective (i.e., the trader feels the stock is vulnerable to losses that should be protected by a long at-the-money put) and pragmatic (i.e., the trader would gladly unhand the underlying stock position if exercised on the short call. The apparent sale of those $15 puts would seem to rule out the possibility of a new pass at Toll Brothers’ 52-week low of $15.49, which lends some credence to a scenario of slow recovery beginning in December.
UHS – Shares in the country’s third-largest hospital management company, Universal Health Services, rose .15% to $59.27 as its options activity swelled to more than 15 times the normal level owing to what looks like a 2,000-lot straddle sold at the January $60 line. The initial premium acquired at the outside of this trade amounts to $9.85 – a full 16% of the share price owing to the ample time value of the position. The trader in this case is looking for uneventful share price action in Universal Health that will let time decay work its magic on the position, ideally whittling the value to naught by expiration if shares remain at current levels and subject neither position to exercise.
COLM– Shares in Columbia Sportswear, the maker of fleece hiking togs and other active apparel, found themselves on the lee side of the economic mountain, down 8% to $36.63 after earnings missed street estimates. Analysts at Citigroup have reiterated their sell rating on the stock, and option traders are doing little to position against the gulch-level sentiment. An increase in option volume to 5 times the normal level showed buying pressure at the September 35 line, where 2,000 options traded for about $1.53 – a buyer of this strike is looking for a break of the $33.06 52-week low by September 19.
TEN– Shares in Tenneco, the maker of shocks, struts, and emission control equipment for cars, rose .15% to $13.18 after an announcement yesterday that it had won new 14 new customers in North America that are expected to generate $12 million in revenues annually. It looks like an existing Tenneco shareholder may have sought to protect his or her position in the stock against auxiliary damage from the ailing automobile sector by putting on long collars in October and January at the 12.50 and 17.50 strikes. In a long collar, the long put position protects the stock against a dramatic drop below current levels (or, in this case, the 52-week low of $11.47), a shield that is funded by the sale of long calls that also function like a covered call. A comparison of the implied volatility reading on all Tenneco options (81.3%) versus the historic reading on its stock (75.6%) shows about a 7% added risk premium being priced into its options over the next 30 days. The protective action sent today’s option trading volume to 17 times the normal level.
