Today’s tickers: IBB, DNDN, SQNM, HGSI, MOT, GRA, IP, CDE, EMC, HOLX
IBB, – News of Bristol-Myers Squibb’s bid to acquire ImClone excited traders about the many and varied possible M&A configurations in the sector (and helped the sector shake off yesterday’s killjoy Alzheimer’s drug data from Elan and Wyeth). Shares in the iShares Nasdaq Biotech Index – which numbers biotech heavies Amgen, Gilead, Teva Pharmaceuticals, and Celgene among its components – rose 2.7% to set a new 52-week high at $89.49 as options traders appear to be jockeying for a break of $100 and beyond by year’s end. With more than 12,000 options trading, we saw fresh and heavy buying pressure in December 100 strike calls, which traded at more than double the open interest at $1.35 per contract – this reflecting about a 1-in-5 chance that the index can break $100 by December 19. Fresh longs at speculative call strikes extended into the January contract at the 105 strike, which traded nearly 3,000 times at 65 cents – the options market currently prices in about a 13% chance of that occurring. The fact that traders are buying into these odds suggests many feel liberated to wager on higher highs for the sector as a whole into 2009.
DNDN, – Elsewhere, option traders seem to be favoring long collar strategies designed to protect gains on an underlying stock position. This was the case in Dendreon, the developer of antigen-identifying drugs for cancer treatment, whose shares rose 2% to $5.80 along with the broader sector. Implied volatility on all Dendreon options ticks in at 79.7% – some 26 percentage points above the historic level of volatility that’ Dendreon stock has already charted – and this elevation can be explained in some measure by the fact that Dendreon is due to report earnings next week. Today’s volume shows traders largely bypassing the front month and turning to the November contract, where a 20,000-lot long collar was put on at the 2.50 put line and the 12.50 call line. When entered in connection with an underlying stock position, the long put position protects the stock against an undue decline (…in this case, as it involves the $2.50 put strike, a catastrophic one), while the short, out-of-the-money call represents the price at which the trader would be willing to unhand the stock at a significant premium to current levels. While the short call is often used to fund the purchase of the long put, giving the trade an attractive cost-control aspect, in this case the trader would have taken a 90-cent credit on the deal to boot. Dendreon shares last visited the $12.50 level in the spring of 2007, during the height of drama surrounding FDA approval of its prostate cancer drug Provenge (the FDA ultimately requested new clinical data from Phase III trials of Provenge – and this data is reportedly available later this year, which could explain the positioning in the November contract.
SQNM, – A similar collar strategy was deployed in options of Sequenom, the maker of genetic analysis products for diagnostic and molecular medicine. Sequenom shares have shown a meteoric, 121% rise for the year-to-date – a rapid-rise tendency reflected in the 80% 30-day historic volatility reading on the stock. With shares up .24% to $21.20, our option scanners recorded an increase in option trading volume to 6.5 times the normal level on Thursday, which showed traders buyer August 22.50 calls and selling September 17.50 puts in seeming anticipation of a continued bullish run into the fall. The 5,000-lot collar was deployed in the December contract at the 20-strike put line and the 30-strike call line – in this case involving a debit of $2.30 that suggests the trader is keen to protect gains in the stock and wants to see it rise above current levels, but is willing to relinquish the shares at $30. This would still be a $7 premium to Sequenom’s 52-week high.
HGSI, – Shares in Human Genome Sciences also advanced sharply today, up 2.5% to $6.79. Here we feel it worth notice that one day after a narrow earnings miss, the company’s implied volatility remains very elevated at 73.2% against a 62.9% historic reading on the stock. Elevated volatility tends to enrich option premiums, making them costly to buy and lucrative to sell. An increase in options trading volume to nearly 8 times the normal level today showed evidence of a trader taking advantage of that relationship between volatility and option premiums, selling a 1,500-lot January ’09 7.50 straddle for a combined premium of $3.35 – an astounding 50% of the current share price. The trader in this case wants to keep that initial credit intact, hoping that time decay will whittle away at the value of the position as implied volatility recedes – and that ideally, both positions will expire worthless in mid-January if Human Genome Sciences shares are trading at $7.50.
MOT, – News that number-three handset maker Motorola had managed to wring a small profit during the second fiscal quarter sent shares 12.6% higher to $8.66 – well within the 14% move that front-month options were pricing in yesterday. While Wednesday’s volume showed traders taking advantage of a 22% pullback in implied volatility from Monday’s elevated levels to buy into defensive put positions at the 6 and 7 strikes, today’s earnings move richly rewarded the holders of $7 calls, who bought those positions for 94 cents yesterday and appeared willing to take profit on them today at $1.65. Fresh buying pressure extended as high as the front-month 9.00 strike, while those 7.0 puts that traders readily accumulated yesterday sold off for just 3 cents apiece – down 89% in value overnight. Stepping over the market’s confetti, analysts were quick to point out that Motorola still has a long road ahead in terms of maintaining its position on the North American market and keeping costs under control. One option trader appeared to side with this rather muted forecast via a 3,000-lot put spread in October between strikes 8 and 9. A long buyer of this position would pay a 48-cent premium in the belief that current share prices are about as good as it’s going to get for Motorola over the next few months, but would curtail the downside at $8.00.
GRA, – One day after reports of a possible takeout bid for the company from BASF, options in specialty chemicals maker W.R. Grace are still trading on elevated volumes with call-buyers seeking upside exposure in excess of open interest. With shares up 4% to $25.78, options are trading at 22 times the normal level with heavy buying interest in the August 27.50 and 30 strikes. Yesterday, when news of the takeover rumor first surfaced, the initial instinct for many traders was to parlay their price-tag bets in the September contract. Today we find traders upping the ante on a possible going price – and hastening the timeline in the August contract. Implied volatility on all W.R. Grace options remains high at 54.7% against the 47.4% historic reading on the stock.
IP, – Call volume in International Paper, maker of office paper, cardboard and corrugated products, has already topped the 52-week high set back on July 18 with today’s rush to calls at the August 27.50 line. Shares rose more than 13% to $27.57 after the company’s Q2 profits beat street estimates today thanks to effective international investments. Traders are seeking fresh exposure to August 27.50 calls, where the implied volatility reading of 42% is sharply elevated above the 38% reading on all International Paper options. This in turn is elevated above the 32% historic reading on International Paper stock, suggesting that the full magnitude of the this earnings-related move may not be fully expressed in the stock.
CDE– Today’s big volatility gain belongs to Coeur d’Alene Mines, the world’s largest publicly traded primary silver producer. Shares rose 1.9% to $2.68 but the behavior of its implied volatility shows an extraordinary level of risk awareness being injected into the mix. Implied volatility at more than 133% is up some 69% on the session on no apparent news catalyst (Coeur d’Alene doesn’t report earnings until August 8) – this measure more than double the historic volatility reading on the stock. Traders appear to be piling single-mindedly into September 2.50 calls at 70 cents apiece, with the 30,000-strong volume here representing three times the open interest at this strike.
EMC– EMC Corp shares tacked on a slight .13% gain to $15.06 as calls continue to be richly pursued following yesterday’s volume landslide. Revelations that much of the bullish volume on Wednesday appeared to be the work of large institutional traders seem to have emboldened others to follow suit, and this already reflected in volume stakes that show traders favoring calls to puts by about 12-to-1 on a total volume of 140,000 lots. Much of this is concentrated in the front month between strikes 15-19 and in the September contract between strikes 15-17, with the October 18 strike attracting heavy volume as well. Implied volatility has come off about 21% today and now at 44.2% compares to a historic reading of 48.5% on the stock.
HOLX, – Shares in Hologic, the maker of mammography imaging equipment, tanked more than 18% this morning to $18.49 (a new 52-week low) on poor Q3 earnings numbers and a sharp paring of year-end guidance. The ensuing 11-fold increase in options trading volume showed traders calling the move oversold. Volume at the September 20 put line amounted to more than 4 times the open interest at this strike, and appeared mostly initiated by call writers taking a $1.70 credit in the belief that Hologic shares will bounce back quickly after today’s setback. Shares closed yesterday at $22.85.
