Today’s tickers: JBLU, NWA, BBH, BIIB, RIGL, C, LEH, WM, COST, VIX
JBLU – Consolidation-mongerers finally got their fix today on news that Europe’s second-biggest airline, Lufthansa, bought a 19% minority stake in discount carrier JetBlue. Trading was halted on JetBlue shares earlier in the day, but stocks quickly advanced 14% on the report, closing at $7.15 this afternoon. Options in the airline traded at more than 9 times the average volume, and we observed plenty of fresh longs, not just in calls but in puts. A wave of buying in the December $7.50 on volume surpassing existing open interest by some 60% suggests bullish implications for its share price for the next couple of weeks. But we also noted a wave of fresh put buying at the distressed January 5.0 strike – a bitter reminder of the battering JetBlue’s share price has taken this year as the company struggled to hedge against rising fuel prices. JetBlue shares were coasting at around $12 to start this year, declining to a $9 plateau from August to late October, and then dipping below the $7 mark until today’s news out of Lufthansa.
NWA – Let it be said that the airline space continues to search in vain for a lift these days, and the Lufthansa-JetBlue report had little in the way of significant positive follow-through for other major carriers. Option volume in Northwest Airlines accelerated to more than 12 times the normal level as a trader appeared to roll over an existing position in the December 15 puts into the same strike in the January contract. The move occurred as Northwest shares closed 1.23% lower at $16.00. The price of the January put position requires a test of the $14 level – that’s the existing 52-week low – just to break even, and current premiums reflect a one-in-three chance at that coming true. At least one major investment bank agrees with this dour outlook for major airlines, with a Morgan Stanley downgrade of Northwest, Delta and US Airways citing eroding prospects for leading carriers as long as upside catalysts in the form of consolidation or lower fuel prices continue to elude the industry.
BIIB – Biogen Idec – Option volume in Biogen Idec, the maker of drugs for non-Hodgkin’s lymphoma and multiple sclerosis, tripled on premarket news that Biogen will withdraw plans to pursue a buyer, as no possible suitors were forthcoming. The announcement sent its share price hurtling 23.7% lower to $57.85. A look at the 120,000 options in play shows volume of 9,405 lots in the January 50 puts sold as the value of this contract increased 550% on the session. Selling in Biogen’s January 60 calls suggests that some traders may be looking to short volatility in anticipation that the share price will remain between the $50-60 range (around current levels) into January – not a very temperamental range, considering that its shares have traded as high as $84.75 and as low as $42.86 over the past year. Fresh liquidity was also drawn to the December 60 calls, which were bought and sold on a volume of more than 4,000 lots.
BBH – Our attentions were also seized by a spike in implied volatility in the Biotech HOLDRS Trust this morning. The implied vol reading currently stands at 21.6%, moderate by the most cynical yardstick, but still representing a 14% jump on the session. The trust holds common stock in biotech companies ranking among the industry’s top-20 as measured by market cap and trading volume. Components include not just today’s big mover Biogen Idec, but also Genentech, Amgen, Shire PLC and others. While its underlying share price skidded 3.6% to $166.46 this afternoon, option traders put some 6,000 options in play, adding up to about 18% of its open interest and 4 times the average level of volume. Of these, three times as many puts traded as calls, though a directionally bearish view is far from certain here. Puts at the January 170 and 175 strikes traded freshly to the middle of the market, while calls at the 170 strike were bought at around $2.80 – a position requiring a 4% recovery from current levels just to break even.
RIGL – Rigel Pharmaceuticals – Shares in Rigel staged a spectacular 228% gain this afternoon to $26.30, as options volume accelerated to more than 105 times the normal level. The gain followed news that stage-two clinical trials of its rheumatoid arthritis compound, R788, modified symptoms in patients when added to a standard remedy. Rigel’s share price has fared well as far as health care stocks go, posting 39.6% returns over the past year – solidly outperforming the Russell 2000 Health Care Index by some 30%. This massive one-day gain comes about a month after Rigel shares lost 36% of their value in the month of November. Traders have taken a bullish view of the company’s prospects, with fresh writing in the December 12.50 puts, along with fresh liquidity in the March contract, as puts at the 12.50 line were sold and calls were bought at the conservative 15 strike.
C – Citigroup – A 1.5% decline for Citi shares to $31.05 nonetheless has 251,500 contracts in play this afternoon, with puts outmoving calls by a narrow margin. Of note here is heavy buying in January 32.50 calls, while December 30 puts were sold on a volume of some 7,600 lots as the value of the latter position gained about 55% overnight. This reflects a guardedly stable view of the prospects for Citi’s share price, which continues to linger within about a dollar of its 52-week low.
LEH – Lehman Brothers – Initial gains following the release of less-dire-than-might-have-been earnings were erased late this morning, and Lehman’s share price declined .76% to $61.35. Implied volatility retreated 12% to 52.3%, as option traders put some 115,000 contracts in play, put volume more than double that of calls. Traffic appears particularly centered in December 60 puts, which have been bought and sold heavily, alongside puts at the 55 strike, suggesting that neutral-to-bearish spread activity may be in favor.
WM – Washington Mutual – Somewhat contrarian option action in the financial space occurred this morning in Washington Mutual, whose share price took another 2.7% bruise on the chin to $15.63, paring earlier 7% losses but still setting a fresh 52-week low that represented a fractional third of its 52-week high. The Seattle-based thrift has been perceived as increasingly desperate in the market this week on news that it plans to issue $2.9 billion in convertible preferred stock to prop up its capital, boost its loan loss provisions and cut jobs. An analyst downgrade of the stock by Bank of America this morning should have cemented that view, but we nonetheless observed some option traders looking to sell puts at the December 17.50 line, pocketing the $2.70 premium, while calls at 17.50 line in the December and January contracts were bought. The December call, which at $0.10 looks like a bargain, reflects the market pricing in about a 9% chance of landing in the money expiry. Hope springs eternal, as they say.
COST – Costco – Option volume in the popular wholesale-and-remainders franchise Costco accelerated to more than 3 times the norm as shares dipped 2% to $68.65. The move followed the release of Q3 earnings that beat street estimates, but its profit margin numbers failed to sit well with investors, and a look at the volume distribution shows investors seeking to recalibrate their exposure more defensively this morning. Puts at the December 65 line were bought heavily this morning, and January volume showed traders selling calls at the 70 strike and buying into the same strike in the puts, paying some $3.30 for the position.
VIX – The CBOE Volatility Index closed flat today at 22.47. The S&P 500 index has thus far failed to penetrate the 1467 Wednesday low point and as such has kept option traders on the sidelines. The VIX reading itself has remained in check while volatility in the stock market has been pretty extreme this week with a weekly range for the S&P of 1523 to 1467. Option trading is light at just 33,000 contracts with December remaining the favored bet with just one week before expiration. On the put side it appears that an investor is betting that VIX will remain above 22.5 ahead of Friday’s close next week. Some 4,000 puts appear to have been largely sold at around 0.9 premium. Elevated volatility through next week will allow that investor to walk away with the entire premium. If, however, equities stabilize in response to the coordinated central bank liquidity drive next week, volatility will likely slide. Monday is the first test with the Fed and ECB offering a $30 billion auction. ON the call side of the VIX index, investors appear to be hovering up calls at eth 25 strike at just 0.50. In the January contract it appears as though the 25/32.5 call spread might be at play at a net debit of 1.70 giving a breakeven of 26.70.
