Today’s tickers: MNST, MER, URI, WEN, ETFC, ELN
MNST – The expiration-week M&A rumor mill appears to have tongues wagging at online recruiter Monster International. Shares in the company closed 3% higher at $37.67 this afternoon as implied volatility on its options – which indicate the level of anticipated future up-or-down price movement – rose 31% to surpass 57%. Its options, meanwhile, traded at nearly 13 times the average rate today, as we observe buying at twice the level of open interest in the November 40 calls, with call-buying interest extending into the December contract at strikes of 40 and 45.
MER – Options in Merrill Lynch traded on a volume of more than 190,000 lots as its share price basked in a 2% gain, closing at $58.10. Volume picked up dramatically ahead of the news that former NYSE chief John Thain would fill the top desk at the brokerage recently vacated by Stan O’Neill. Earlier today, options traders appeared to pile into the November 60 calls, with this afternoon’s volume of 22,000 lots exceeding the open interest on this strike as premiums surged. 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. A look at the January contract showed possible evidence of bull put spread activity, with the 45 puts being bought and puts at the 55 strike being sold.
URI – Shares in United Rentals (URI), the largest U.S. construction equipment rental company, fell more than 30% to $23.70 this afternoon on concern 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 to us early in the session was what appeared to be fresh selling in the November 25 puts on a volume of 6,000 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 traded 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 2.9% to $30.73. Today’s volume is was heavily localized in December 30 puts, which sold off heavily on a volume of 27,000 lots – matching up against more than half the prior open interest on this strike. A writer of this put may be looking to pocket premium against the expectation that Wendy’s shares will take Peltz’s snub on the chin and remain above $30 into December, leaving the puts to expire worthless. The current share price is barely a dollar above its 52-week low.
ETFC – Shares in E*Trade recovered another 11% this afternoon to $5.55, while the option volume of 118,000 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 gained 1.1% to $22.75 despite 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 60%, and a look at open interest shows bulls still in the catbird seat, with 1.7 calls open for every put.
