Today’s tickers: TGT, SBUX, GM, XLY, XLB, AUO, CFC, DISH, CCU
TGT – Ahead of tomorrow’s before-the-bell Q3 earnings from big-box retailer Target, investors may be thinking better of bullish positions entered on Friday’s decent-ish market performance and attendant pullback in volatility. Today’s decline for Target shares is barely skimming the surface of Friday’s close at $53.54 – still within 40 cents of the 52-week low. A look at volume distribution shows volume of 14,000 trading to the middle of the market in the December 55 calls and of 13,000 trading to the mid in the December 60 calls. The move comes one session after similar-sized positions were opened at these strikes on Friday – and in the case of the December 60 calls, today’s trading price is unchanged from Friday’s level.
SBUX – A little java and plenty of juice in Starbucks options today – and on a day of thoroughly decaffeinated market action for most tickers, we were interested to note the bias toward calls. With shares down 1.2% at $22.90, early market action showed traders hankering to buy December calls at the 22.50 and 25 strikes on a volume of about 2,000 each. But speculative interest in the January contract would seem to play against upside expectation. The January 25 calls have traded on an aggregate volume of nearly 79,000 today – this compared to open interest of just under 18,000 going into today – and these have traded primarily to sellers, suggesting a move to take in premium on calls not expected to land in the money come expiration (delta on the January 25’s implies just a one-in-three chance of profitability for a long position). Note here the massive comedown in implied volatility and uptick in historic volatility since last week’s tepid earnings report. Last Thursday its implied vol reading stood at nearly 42% against just 26% historic volatility in share price – today those figures have flip-flopped, with implied reading at 35% while Starbucks’ historic volatility exceeds 40%. GM – Shares in top automaker General Motors lost nearly 8.5% today to $26.79 – a new 52-week low – following a report in the Wall Street Journal that the company has resorted to a new “Red Tag” sales event in a bid to jump-start languid consumers reelings under the double-whammy of higher fuel prices and depressed property values. Option traders responded by putting more than 80,000 options in play. About a quarter of this was situated in puts at the December 27.50 strike, which appreciated in value some 72% on the session, with volume equal to more than half of the existing open interest in play. A look at implied volatility shows option traders expecting about 16% more volatility from GM shares going forward than they have shown historically.
XLY – Consumer Discretionary Select Sector SPDR traded down 2.3% Monday to stand at $33.25. Activity today of 15,000 contracts compares to current open interest of 129,540 contracts. Put side activity today shows up on our put/call ratio scanners thanks heavy put-side volume. In the January contract it appears that an investor placed a 7,000 lot put spread for a net cost of 0.82 per contract. The 33 strike puts were bought at 1.24 while the 30 puts were sold at a credit of 0.42. By selling the lower strike puts the investor limits any gains on the protection afforded by holding the puts at the 33.0 strike. But the play looks interesting since the magnitude of a decline to reach the lower strike at 30.0 would be in excess of 10% at this stage. Since its July peak, shares in the consumer discretionary fund are already lower by 18%. A further 2% decline would technically be defined as a bear market and would likely cause further selling pressure. In this case the investor’s perhaps prudent, albeit late-in-the-day play, offers 2.18 maximum profits should the fund slide all the way to that lower strike, for a risk/reward ratio of 2.6 to one. The fund printed a fresh 52-week low in Monday’s session. Companies included in the fund’s composition include McDonald’s Corp., Time Warner Inc., Walt Disney Co., and Home Depot In.
XLB – Basic Material Select Sector SPDR traded a 52-week high as October rolled out but thanks in part to a 3% slide today, the fund price stands 11.3% lower just three weeks later. Investors seem to be mirroring the bear put play in the materials fund where a 10,000 lot spread has been placed across the 39 and 36 strikes at a net cost of 0.90. That gives this spread a similar 2.3 to one risk/reward ratio. Should shares decline 8.2% from today’s $39.20 the fund would reach the lower strike price here. In that case the spread ought to be worth 2.1 points at which point the gains are maximized. Basic materials had been a great place to be lately since it apparently offered investors exposure outside of the United States to those regions where economic activity continues to shine. Today’s U.S. inspired market slide is challenging that logic. Companies held within this sector fund include Monsanto Co., Due Pont., Dow Chemicals and Freeport McMoRan.
AUO – AU Optronics Corp. (ADR) – Just as America prepares itself for Thanksgiving, retail analysts will be keeping a larger than usual eye on Black Friday store sales. The day after Thanksgiving marks the onset of holiday shopping and is the biggest retailing day in the calendar. With JC Penney and Macy’s already having cut quarterly earnings estimates and Lowe’s Corp. validating fears of a housing-led slowdown in consumer spending, this week will be an especially widely watched barometer of consumer health. Shares in Chinese flat panel maker, AU Optronics reversed last week’s 52-week high in its share price as investors bought puts on the stock to reflect fears of a slump in sales of notebooks, desktop monitors, digital cameras and camcorders and in-car television screens. The 7,700 lot put action in the January 17.5 puts would protect investors from a recoil below $16.15 in its share price. The shares today declined 1.8% to stand at $19.07. Open interest at this strike prior to today was just 300 contracts confirming that this is fresh positioning. The slide in the ADRs and the bid for put options boosted the premium by around 30% today. The put/call ratio of 19 times ensures a place on our market scanner today. The put play of 7,700 lots compares to open interest of 16,465 lots.
CFC – Shares in Countrywide Financial slid another 10% to $10.82 this afternoon, with some 110,000 options in play in concert with a 33% climb in implied volatility to 116.9%. Today’s news catalyst appeared to be a report that investors may attempt to unload some $4 billion of the company’s debt, although the share price is still reeling from last week’s report that October mortgage-loan fundings declined 48% from a year earlier, and this – coupled with a general attitude of bottom-fishing in financial issues today- may be contributing to the bearish pile on Countrywide shares and options. Of note here is heavy buying in the December 10.0 puts, with premiums up some 57% on the session, along with heavy buying in the December 7.50 puts, which have doubled in value. A look at the delta on this put shows just about 15% chance of Countrywide shares dipping to such morose levels over the next month, but such is the tenor of today’s market that this strike has roughly the same delta, but twice the volume of the December 15 calls – which have sold off heavily as option traders apparently seek to cordon off any upside expectation for Countrywide’s tamped-down share price in the near future.
DISH – Implied volatility in Echostar Communications shares jumped nearly 52% on the session today as its shares gained more than 20% to $47.77, having breached the $50 mark earlier today, following reports that AT&T may be assembling a bid for the company. A look at the option positioning shows heavy buying and selling December 45 calls, which gained some 850% in value overnight, while heavy buying in the January 50 calls on a volume of 7,000 lots shows these options commanding as much as $7.00 in premiums, implying a climb for Echostar shares to $57.00 by mid-to-late January.
CCU – Shares in Clearchannel Communications, the nation’s largest radio company, closed nearly 3% lower at $33.52, having set a new 52-week low earlier today. As late as last week, Clearchannel’s arbitrage spread – a gauge of the disparity between the current market price versus the offered price of a company in the midst of a takeover – was measured at some 10.5%. A note about the arbitrage spread – a higher reading means a wide spread, indicating doubt among investors as to whether the acquisition will go through. On the option front, we tend to look at implied volatility relative to the historic reading for a gauge of investor discomfort regarding a company’s share price, and in both respects investors appear ill-at-ease regarding Clearchannel’s forward share price action. Implied volatility in Clearchannel options rose 22% percent this morning to stand at 50% – reading more than twice the historic reading. Meanwhile, its options are trading at more than 9 times the average frequency with what appears to be put spread activity in the January contract between strikes 30 and 32.50, all trading to the middle of the market.
