Today’s tickers: YHOO, MU, NUE, FNM, DVA, BGP, GRMN, BHI
YHOO – Shares in Yahoo! gained more than 5% this afternoon – far outpacing marginal gains in the broader Nasdaq index – following a new round of takeover scuttle involving Microsoft. Speaking at a UBS investor conference, Microsoft division president Kevin Johnson outlined plans for the software giant to expand its share of the online search market threefold from 10% along with its share of the online ad market. Pundits in the blogosphere responded by stating that the only way Microsoft could achieve this strategy was by acquiring Yahoo. Implied volatility ticked modestly higher from 47% to 50%, still comfortably below its 57% historic reading. With shares at $26.73 we observed brisk buying action in out-of-the-money December 30, 32.50 and 35 calls, all on sharply higher premiums, and despite the fact that the latter strike’s delta suggests just a 8% chance of landing profitably by yuletide expiry. Traders also appeared keen to unload in-the-money puts at the December 30 strike, suggesting continued upside price action in December, even without a Microsoft bid.
NUE –Heavy liquidity in out-of-the-money puts, coupled with crazy volatility trends in the entire metals complex, led steelmaker Nucor (NUE) to tick our market scanners despite a near-3% gain for its share price to $52.46.
Fresh volume involving some 24,000 lots traded to the middle of the market in the December 45 puts, along with another 22,750 lots trading in the January 42.50 puts. Our attentions were piqued by the fact that both of these strikes were so deeply out of the money, leading us to suppose that this may be a credit spread in which the trader sold the January 42.50 puts for $1.20 per contract to establish a credit against the purchase of the December 45 puts at $0.90. The trade results in a $0.30 net credit that also leaves the trader long of puts at that December strike, and positioned in favor of a comedown in implied volatility for the steel sector after the current wave of consolidation rumor subsides by January. Nucor shares bottomed out this year at $41.01 in mid-August.
MU – Options in semiconductor Micron Technology traded at 13 times the average volume – with calls moving at their highest rate in more than a month – as shares declined about 1% to $9.15. Today’s volume was due in large measure to activity in the January ’09 contract, with what may be selling in the 10/12.50 strangle in anticipation of a comedown in volatility heading in to 2009 that would bear out in rangebound share price activity for Micron.
FNM – Executives at Fannie Mae, the country’s largest buyer and underwriter of home mortgages, found themselves in hotseat today, urged to defend their method of accounting credit losses in an investor conference call. Fannie Mae shares declined 10% yesterday after questions arose over the so-called “cure rate” on loans bought from mortgage bond trusts. Price action today shows the damage control bid did little to smooth ruffled investor feathers.
Implied volatility in Fannie Mae options gained nearly 20% to start the session as its shares lost 5% of their value to close at $40.88 today. With 86,000 options in play we observed traders rush to buy November 40 puts on a volume twice the existing open interest, paying around $0.45 on an eleventh-hour bet that Fannie Mae shares might end the session at or below $39.55 – as of 4 pm, the market wasn’t there yet! Still, the dour view extended into the December contract, where puts were bought at strikes of 35 and 40 in fresh positioning. A look at the overall open interest in Fannie Mae options shows 1.3 puts open for every call.
DVA – Davita – Shares in Davita, which operates kidney dialysis service centers in 41 states, closed 2% higher today at $59.54. A look at the option action showed the 26,000 contracts in play match up to some 70% of its existing open interest, and nearly 10 times the average daily volume. Davita’s 52-week high of $67.44 was set in late October, and its shares have come off some 13% since that time owing to a Q3 earnings miss and two analyst downgrades. In a statement to accompany its November 2 earnings report, the company conceded that it was entering a period of “unusual earnings uncertainty,” but a look at the options action would seem to suggest bullish price action expectation in January, with buying action appears to in force in the January calls, at strikes of 60 and 65. Added to this was risk reversal activity involving out-of-the-money strikes in April 50 puts and 70 calls.
BGP – Borders Group – Investors are throwing the proverbial book at retail bookseller Borders. Shares closed 4.35% lower at $11.86, ahead of Tuesday’s earnings report, and a look at the option distribution shows little expectation of happy ending forthcoming. With about 12,200 lots in play, options moved at 26 times the daily average, with what appeared to be fresh long positions in the January and February puts at the 10 strike. Given today’s premiums, the breakeven on these contracts implies a move into single digit share price for Borders – breaking below an 8-year low. Borders shares are down 51% for the year to date, underperforming arch-rival Barnes and Noble by some 34%.
GRMN – Shares in digital mapmaker Garmin, the name behind some of the world’s best-selling GPS systems, gained more than 16% this afternoon to $97.79 – this after the company withdrew from a bidding war with rival TomTom to acquire that company’s Dutch peer TeleAtlas. Garmin announced that it has decided instead to extend an existing agreement with US-based company Navteq, the company recently bought out by mobile phone giant Nokia. Investors appeared relieved to see Garmin dodged a proverbial bullet in opting against pursuing Tele Atlas, which would have cost the company $3.4 billion and diluted its earnings until 2010. Option traders, meanwhile, responded by putting 114,000 lots in play, with buyers piling into the November 100 calls on a level exceeding prior open interest. With zero time value to toy with, the contracts were bought for around $0.15 apiece in a bid to capitalize on Garmin’s wave of good feeling. In the December contract, meanwhile, it appears that investors may be selling strangles in combinations between the 85 and 105 strikes in anticipation of return to a calmer trading range.
BHI – Baker Hughes Inc – Options in the world’s third-biggest oilfield services provider traded at 3 and a half times the daily average as its shares gained more than 2% to close at $80.50. With nearly 29,000 option contracts trading this afternoon, we noted a 15,775-lot transaction go through in the January 65 puts. These traded to the middle of the market at $1.00 apiece – given current premiums, a buyer of this position is wagering on a 20% drop in Baker
