Today’s tickers: BIDU, VIX, JWN, SII, F, GM, WMT, NRG, GSF, GOOG
BIDU – When Confucius said that a journey of a thousand miles starts with a single step, he didn’t know he was likely referring to the share price performance of Chinese Internet search-engine Baidu.com. Just one year ago the shares could be bought for less than $100 each and until today the march upwards has met with only a tiny degree of resistance. Shares traded at a record high this morning above $350. the company has been likened to Google, with the added boost that the company operates in China, where replication of just half of the success that Google has had, will lead to a phenomenal performance for Baidu. However, today’s revenue forecast reduction from a JP Morgan analyst sent shares into a tailspin quickly losing 10% of its value. The latest 65% EPS growth and all of the opportunity that the company promises in Asia has left the company sitting on a PE ratio of 156 times. JP Morgan only reduced its revenue forecast by 3.2% to $65.7 million but perhaps the episode serves to remind investors that Baidu revenues don’t compare to those of Google and that no matter how attractive Asian markets might appear, investors need to understand the size and profitability of the companies they are investing in. Today’s move weighed heavily across the market and turned a positive day into a key reversal with many markets reaching record heights before closing lower on this side of the Atlantic. This might upset the cozy applecart in the fourth quarter where investors were beginning to overlook the low bar set for minimal earnings growth.
The downgrade sparked heavy options trading on Baidu. There was heavy selling in the October call at the 350 strike, which was the most heavily traded series today. More than 700 calls traded to the bid at a premium of around 17.0. Earlier in the session, the same calls were traded at premiums in excess of 20.0 and during the fallout lost as much as 75% of their value trading at 4.5. In the November contract put buyers emerged on decent volume as low as the 280 strike indicating a fear that Baidu shares may fall further in coming sessions. Options implied volatility jumped 21% to stand at 91% late in the session as options traders were caught on the hop with the oversized reaction to the news. The historical movement on the share price is around half of today’s closing options volatility.
VIX futures surged late in the session as the stock market turned southwards reversing a triple-digit Dow industrials gain and turning into a 69 point loss. As such investors reached for portfolio insurance and bought VIX futures driving the index up from a loss on the day to a 13% gain to close at 18.94. Heavy volume was apparent in the November strikes at the 22.5 and 25 contracts where premiums rose by around one half this afternoon.
JWN – Bearer of bad retail tidings, department store chain Nordstrom cropped its Q3 profit forecast due to weak sales growth and stagnant inventories. Shares are currently trading 6.5% lower at $45.41, 12% below its average share price for the year to date. A look at today’s option action shows traders bearing little confidence that Nordstrom can pull off a substantial recovery even after the holiday shopping season. Some of the volume in the January contract looks like it may be deployed in call spreads, involving the purchase of the 45 calls, funded by the sale of the same month’s calls at the 50 strike. A look at the delta on the 45 calls shows option traders pricing in better than 50/50 chance of that strike being profitable by expiry. By comparison, the 50 strike has only about a one-in-three chance of landing safely in the money. To put Nordstrom’s current woes in perspective, last winter’s sales took Nordstrom shares within range of $60 – its standing 52-week high of $59.70 was set back on February 22.
GSF – Offshire oil driller GlobalSantaFe, which operates a fleet of 61 marine drilling rigs, is trading 2% higher today at $79.30, and the options market is rife with bullish speculation in the company. Options are trading at 28 times the average volume, with the 76,000 active contracts matching about a fifth of prior open option positions in Global Santa Fe. Today’s volume is split between the October 80 and November 85 calls, which have traded to buyers on sharply higher premiums, as traders wager on a move past the standing 52-week high of $80.34 by mid-November.
SII – Fellow oil services ticker Smith International, the producer of small hardware for the oil and gas exploratory and production sectors, is also revelling in a 1.5% gain in shares to $74.76. Options are moving at 10 times the normal level, with trading in calls and puts picking up sharply today, on no apparent news catalyst. The brisk buying in the October 80 and November 85 calls, implying continued upside tear in the next two months, is given particular gravitas when you consider that Smith’s prices have more than doubled in value this year. Today’s share price represents a fresh 52-week high. Implied volatility has remained mostly steady since late August.
F- Yesterday’s 6-hour walkout by Chrysler auto workers under the banner of the UAW was mercifully brief thanks to an accord that will create a union-run medical fund for Chrysler workers, but without the rub of future job guarantees like those wangled from talks frontunner GM. The agreement raised prospects that a strikeless settlement can be reached with tertiary target Ford, generally regarded as the weak link of the three auto makers – the one with the shallowest pockets for concessions and with the greatest potential damage effect from a strike. Ford shares responded buoyantly to the news, gaining 5.6% to $8.69. Volume appears clustered in the November and December contract, where traders wrote November 9.0 calls in fresh positioning, against the purchase of November 8.0 puts. The strategy was reversed in the December contract, where December 9.0 calls were bought against the sale of puts at the 7.0 strike level.
GM – Meanwhile, shares in Ford peer General Motors bounded to a two-year high today, up 5% to stand just above $40 after UAW members ratified the terms of its recent collective bargain agreement. Option traders put more than 308,000 contracts in play, plowing into the October 40 calls, which were heavily bought. The same strike in the November contract attracted buyers and sellers, as the price of the November 40 call doubled in price today. While overall open interest shows investors still defensively positioned in GM options, with puts outweighing calls by a factor of 1.8, today’s volume is an indication of some traders betting on a return of GM shares to 2004 levels.
WMT – This morning’s rise in September same-store sales and upscaling of Q3 earnings guidance were a welcome revelation to investors weary of sifting through the jumble-sale prospects of leading retailers. Just a couple of months ago the big-box chain was sounding the alarm over the pinched state of the American discount consumer. The news sent shares 3% higher to $47.00 today, with more than 102,000 option contracts in play. A look at options action shows traders less inclined to jump on the directional bandwagon and likelier to take profits. Twice as many calls are moving as puts today, with heavy selling in the November 47.50 calls, where premiums increased 100% overnight. The urge to close out call positions extended into the December contract at the 50 strike, where premiums are up 62% today.
NRG – Shares are currently 1.6% higher at $44.39, having been up as much as 4% early in the session, sending options traders on a quest for bull plays. With options trading at more than 5 and a half times the average volume, call buyers are plying into the 45 and 50 calls in the October, November and December contracts on sharply higher premiums. Implied volatility, at 40% and rising, also shows a keen elevation from the 25% historical reading. NSF reports earnings on October 29.
GOOG – The enchanted search engine continues to cast a spell over market bulls, but early gains have turned flat this afternoon, as the ticker trades at $624.04 this afternoon. Option players activated more than 211,000 contracts this afternoon, with a volume bias to calls. The upward trek was accompanied by implied volatility – which took a 12% leap this morning, 1 week ahead of earnings. Today’s activity is a call flurry in the front month contract at strikes of 620 to 650, with builds at the 750 strike seen in October and November after a fresh wave of punditry betting on Google “trigger-numbers” in the $735-750 range.
