Today’s tickers: IR, EWM, SWHC, DO, VIX, GOOG, LIZ, FMCN, ANR
IR – Options in industrial truck maker Ingersoll Rand are trading at more than 12 times the average volume, according to our “Hot by Options Volume” scanner. Shares in the company lost 3.7% today to $50.01, one week after raising its earnings guidance for the year as a result of the July divestiture of its Bobcat construction equipment unit to Doosan Infracore Inc. Today’s option volume looks to have been tied up in strangle selling in the December contract at strikes 50 and 52.50, a play wagering on a decline in volatility for Ingersoll Rand shares heading into the close of the year. While the share price has remained fairly reliably above $50 for most of October, the upper strike in play in this strangle is still 6% below its 52-week high, making it the bias of the trade modestly, but not overly optimistic, in Ingersoll Rand’s performance ultimo 2007.
EWM – For a second consecutive session today, options in the iShares MSCI Malaysia Index ETF have been tracked by our “Hot by Options Volume” scanner, with contracts trading at more than 50 times the average frequency. The ETF’s underlying share price mimicked the Kuala Lumpur composite’s performance earlier today, closing flat-to-lower on the session at $12.86 – still within 13 cents of its 52-week high, and it looks like option traders are positioning for the break into record territory to extend into next spring. This bullish view was expressed through an 8,000-lot risk reversal trade at the April 13 line, where a trader sold puts and bought calls in anticipation of added upside.
SWHC – Smith & Wesson, the holding company behind the fabled handgun maker, cocked our “Hot by Options Volume” scanner with a 20-fold increase in active option volume. The move followed a near-40% gutting in Smith & Wesson’s share price to $12.15 as the company cut its earnings guidance for 2008 on higher marketing costs and a curtailed fall hunting season. Most liquidity was found in the December 17.50 calls, which traded heavily on sharply depressed premiums. A writer of this call one week ago would have opened the transaction with a credit of $4.20 – buying the calls back today costs just a quarter. The hunt has indeed been bloody this autumn in Smith & Wesson shares, which have nearly halved in value since the August high of $22.80.
DO – With nearly 185,000 option contracts in circulation today, Diamond Offshore Drillers is one of the today’s top volume performers and relative volume gainers. Shares are down 3% to $111.35, a week after reporting a 25% jump in Q3 profits. Given the price of the underlying and the price action in options, which are concentrated in January ’08 calls at strikes of 50, 65 and 70, it looks like some investors may be playing these deep in-the-money calls as a proxy for shares, taking advantage of the higher delta on the calls as a leveraged opportunity to profit as the share price rises.
VIX – With shares down narrowly in anticipation of this week’s Fed rate announcement, volatility has taken a catbird seat in the minds of investors. The VIX index closed at a 5.6% “fear premium” to 21.00, with traders flocking to the November 25 calls, where nearly a third of the active volume so far is centered. These calls were bought on premiums up more than 15% on the session to $1.10. It’s possible that some of this volume is tied up in call spread activity with the November 35 calls, which traded to the middle of the market at $0.30 apiece. A spread trade of this nature implies a break above 25 within the month of November, not to exceed the August highs near 35 – a scenario that seems plausible if the Fed fails to appease the market with another juicy rate cut this week. Elsewhere in the VIX series, 11,000 lots traded primarily to sellers in the November 18 puts – another hint that today’s mood favors elevated volatility, not an anticlimactic pullback.
GOOG – Reports that an announcement on its gPhone plans may be forthcoming within the next couple of weeks has sent Google shares up 2.3% today, sitting just under the $700 mark at $694.48. With 183,000 active option contracts moving, today’s volume is equivalent to nearly a quarter of its overall open interest. Calls out-charged puts by a factor of 1.5, most of it centered in the front month calls at the 700 strike. Interestingly, implied volatility is maintaining its post-earnings pullback, currently sitting at 27% against the 28% historic reading.
LIZ – Liz Claiborne, the maker of the eponymous upscale women’s clothing line and licensee of Kate Spade purses and Juicy Couture, reported a 65% drop in Q3 net income and cut its guidance for the year, citing decreasing department store sales and costs relating to the sale of four los-generating brands earlier this year. This was the eighth consecutive quarterly profit decline reported by the Liz Claiborne company. Interestingly, its shares closed 1.5% higher to $28.77 at this afternoon, while options are trading on a volume of 11,500 lots. While modest in absolute terms, this volume still matches up against more than half of the total open interest, and according to our “Hot by Options Volume” scanner, represents 9 times the daily average interest. Traders have hastened to buy November 30 calls on premiums up more than 50% on the session. The anticipation of upside price action in Liz Claiborne shares is perhaps a pragmatic reaction to a share currently trading within 5% of its 52-week low and well below its six-month average – in other words, a sense that the share has bottomed out and is due for a bounce back.
FMCN – Focus Media Holdings – Options in the American depositary receipts of this Chinese advertising firm traded against a 1.7 % decline in share price to $60.77. With 149,000 options in play, there appears to be brisk block trading activity in the calls. A 30,000-lot spread trade looks to have gone through in the January contract at strikes 45 and 60.
ANR – Alpha Natural Resources – A 5.6% decline to $26.91 had options trading at nearly 29 times the average volume today, according to our market scanners. Action here looked like a bear credit spread involving the sale of December 25 calls at $3.70, beginning the transaction with a net credit against the purchase of December 30 calls for $1.25 per contract. Option implied volatility on Alpha Natural Resources options stands at 45%.
