Today’s tickers: MER, URI, WEN, ETFC, ELN
MER – Options in Merrill Lynch are trading on a volume of more than 103,000 lots as its share price basks in a 5-plus-percent gain, trading just below $60. This morning’s volume driver appears to be gathering expectation that the appointment of a new CEO is imminent, with NYSE chief John Thain widely tipped in the market as the man for the job. On the options front, traders appear to be piling into the 60 calls, with this morning’s volume of 14,000 lots representing virtually all of the open interest on this strike as premiums surge more than 328% on the session. Volume in the December contract suggests that the 65/67.50 call spread may be in play as a momentum build in bullish sentiment on back of the supposed CEO appointment gathers pace.
URI – Shares in United Rentals (URI), the largest U.S. construction equipment rental company, fell 24% to $25.85 this morning on speculation that Cerberus may renege on a $34.50-per-share bid for the company. If a new price cannot be reached reflecting the compromised economic outlook for the company, Cerberus is reportedly prepared to pay a breakup fee and cancel the deal entirely. Implied volatility on United Rentals options has scaled 855% to stand at 85.6% while options volume increased 100-fold overnight. Of interest here is what appears to be fresh selling in the November 25 puts on a volume of 5,600 lots – nearly a quarter of this morning’s moving volume – at $1 apiece. Our initial hunch was that a precipitous stock drop just 2 days before expiry would induce traders to jump into the proverbial foxhole and buy puts. A couple of scenarios explain the volume in the November contract. First, sellers of this contract may be looking to take in the $1.00 premium on the position while playing against the probability that United Rentals shares will dip below $24 – another 7% drop – by expiry. Or traders may be playing this in conjunction with fresh selling in the November 30 calls, selling this strangle combination in the expectation that with volatility peaking out now, the $1.25 premium can be considered a safe credit if United Rentals’ share price closes out this contract period in the $25-30 range.
WEN –Wendy’s options are trading at 5 times the daily volume today after Nelson Peltz’ underwhelming takeover bid for the fast food chain, offering less than the $3.2 billion he was expected to ante up last summer. Consensus among observers is that Wendy’s is likely to reject the offer. Developments have sent Wendy’s share price down nearly 2% to just above $31.00. This morning’s volume is heavily localized in December 30 puts, which have sold off heavily on a volume of 27,000 lots – matching up against more than half the prior open interest on this strike.
ETFC – Shares in E*Trade recovered another 19.4% this morning to $5.97, while this morning’s option volume of 63,000 lots appears heavily localized once again in December 7 calls. These calls continue to sell off heavily – this morning’s numbers bring the number of sold lots at this strike (which is 15% out of the money) to more than 40,000 – open interest on this strike is just 23,000.
ELN – American depositary receipts in Dublin-based drugmaker Elan Corp edged .27% lower to $22.44 after reports that its antibiotic Maxipime will be subjected to a safety review by the U.S. Food and Drug Administration. An article in the British medical journal The Lancet correlated the generic version of Maxipime, cefepime, with an increased risk of mortality. Elan options are moving at 8 times the average volume today according to our scanners, as traders wager on at-the-money straddles in the November and December contracts in expectation of a break above or below current price levels. Implied volatility on Elan options reads at 47%, and a look at open interest shows bulls still in the catbird seat, with 1.7 calls open for every put.
