Today’s tickers: SLM, ERIC, , CAKE, APOL, TTWO, KMX, AIG, COH, TRB, MS
SLM – For much of the afternoon, our market scanners seized upon an unusual level of activity in SLM, the student loan administrator known ubiquitously as Sallie Mae. For those not on the receiving end of its monthly statements, Sallie Mae is preceded mostly by its reputation as a casualty of those summertime credit skids that provoked a J.C. Flowers-led consortium to abandon a $25 billion bid to buy out the firm. Barbed words were exchanged between the two parties to the jilted jointure, but today Sallie Mae’s CEO confirmed that the company may have to resort to a divided cut to shore up finances amid rising defaults and higher borrowing costs. While we’ll refrain from wondering aloud whether the J.C. Flowers party is thanking its lucky stars for having dodged that bullet, we’re obliged to report that the news appears to be the culprit behind a 48% hike in implied volatility to 101%. Options in Sallie Mae traded on a volume of nearly 125,000 contracts – making it one of the day’s most active tickers – following a 20% drop in the value of its share price to $23.09. Fresh liquidity was drawn to the December 25 calls, which were bought and sold freshly despite the imminent expiration date. In the January contract, we noted heavy traffic in the January 45 calls, which traded to the middle of the market at a measly 7 cents apiece. Heading into today, the largest option contract in terms of sheer open interest was the January 50 call, so we wonder if the option market is on the verge of a reconfiguration of its view on the company’s share price heading into 2008. Interest in calls continued into the April contract, however, where we observed fresh volume at the 25 strike.
ERIC – Options on American depository receipts of Swedish wireless tech giant Ericsson attracted more than 22 times the normal level of trading activity, according to our scanners. ADR’s in Ericsson closed 1% lower this afternoon at $22.53, floating on a mixed raft of news out of the company. Earlier today Ericsson announced a new executive appointment in its global services business unit and this week has brought news of lucrative orders won from the likes of Mobilkom Austria and a division of the America Movil Group. Traders may remember an ominous session for Ericsson in mid-October, when the company lost 24% of its capitalization after cutting deep into its quarterly guidance, citing lower sales from mobile network upgrades and expansion. This is the sort of meltdown that Swedes euphemistically refer to as “otur” – bad luck. Other companies might liken it to “Ragnarok” – apocalypse. The scars are still visible in the near 47% historic volatility reading on Ericsson, and its current share price is a meager 25 cents above the abysmal 52-week low.
With that in mind, we were particularly interested to observe what looked like fresh strangle positioning in the April contract between strikes 20 and 22.50. The cost of this position stands at $3.65, covering the buyer in the event of move to the upside past $26.15 or a downside move below $16.35 – imagine, for a moment, Ericsson shares trading at 37% of the 52-week high. A look at open interest shows nearly twice as many open call positions as puts, a hint that some measure of good-natured pragmatism in the company’s outlooks into 2008 remains intact.
CAKE – Cheesecake Factory – Option traders are putting their mouths where Nelson Peltz’s money is…sending volume to more than 26 times the average rate as shares advanced 10.7% to $22.51. Reports that Nelson Peltz’ Trian Management Fund received FTC approval to buy a sizable shareholding in the company appear to have been corroborated by a source speaking with Bloomberg who pegged the stake at 10%. It is worthy to note that heading into today’s session, market sentiment on the outlook for Cheesecake Factory shares favored bearish puts over bullish calls by a factor of 2.6. Indeed, the move comes on the very day that Cheesecake’s peer in the casual dining space, Darden Restaurants (owner of the Olive Garden and Red Lobster chains) reported very dour earnings amid a very dampened analyst consensus for consumer spending in casual dining franchises in 2008.
APOL – For-profit vocational and online schools have been a recurring, if somewhat eclectic, theme on our option scanners – note our recent coverage of unusual option activity in both Corinthian Colleges and Career Education Corporation. Today’s mover is Apollo Group, the owner of online degree giant University of Phoenix, Western International University, and others. The nearly 14,000 options trading stack up to some 13% of the total open interest , and the flurry of activity was accompanied by an 18% spike in implied volatility to 54%. This action is occurring as its shares traded 2% lower at $71.14.
Earlier this month, Apollo’s former CFO testified under oath in a class action suit against the company that Apollo deliberately withheld the content of a U.S. Department of Education report that accused the company of violating federal bans on enrollment-based staff salaries. Despite its legal woes, Apollo shares have shown a remarkable level of resilience in 2007, with all told some 88.6% in returns for the year to date, outpacing sector peer Corinthian Colleges by some 66%. Option traders, however, may be anticipating the end of the line for its charmed run, given the level of buying we observed in January puts at the 65, 60 and 75 strikes.
COH – Ado over the addled state of the U.S. mass-market consumer appears to have spilled over into the more affluent producer segment. Shares in Coach, the country’s largest maker of luxury leather goods, dropped 2.3% to $30.41 this afternoon, setting a fresh 52-week low, after a Bank of America analyst reported that Coach had slashed prices on nine of the 48 purses featured in its holiday catalogue. It’s been a tumultuous 2007 for Coach shares, which are currently trading at 56% of the value of their 52-week high after an autumn tumble sent its shares from the $50 to $30 level in a matter of a few weeks. Its travails are written all over its historic volatility reading, which stands at 48.3%. A look at the 48.4% implied volatility reading shows option traders taking a more measured view of the outlook at Coach, perhaps feeling that the worst of its shocks have already been absorbed. Call spread activity in the January contract between the 30 and 35 strikes would seem consistent with this view.
TTWO – Take Two Interactive – Options traded at 2.3 times the average volume as shares advanced 5% to $18.91. With contract expiration nearly upon us, it appears that traders may have been making closing purchases of December 20 puts at $1.45 – open interest having built at this strike around September 21 when the same position could be shorted for $4.70-$4.80 in premiums. Given the similar levels of volume involved, the trader may have used some of the profits to fund fresh longs the June 25 puts, which were bought for $8.60. Also noteworthy here is the substantial elevation of implied volatility, which at 74% is head and shoulders above the 59% historic reading, in continuation of a volatility trend that has been intact since late-October.
KMX – Carmax – Today’s 7% slide for shares to $20.09 had options moving at twice the normal rate, this after the company missed street estimates for Q3 EPS, reporting a 34% decline in earnings for the quarter and trimming its year-end earnings guidance. With shares trading 8% lower at $19.81, option traders appear to be taking the opportunity to take profit in December 20 puts, open interest at this strike having compounded some 250% over the past week to number 8,287 contracts. Action in the January contract shows traders inclined to sell volatility in the form of the 20/22.50 strangle combination, which costs $1.75 today. A trader in this instance sells the strangle, pocketing the premium in the expectation that shares will remain hemmed in the range of the two strike prices by expiration.
AIG – American International Group – A single transaction involving 58,500 lots in the out-of-the-money January 45 puts catapulted option volume in insurance giant AIG into the top 10 most actively traded option families in the early hours of trading, according to our scanners. These options traded to the middle of the market at around $0.45 apiece, a curious move as AIG shares traded flat-to-higher for most of the session, closing at $56.89. A look at the delta on that put shows option traders pricing in only about an 8% possibility of the contract landing profitably by next month’s expiry.
TRB – Tribune Company – Early turbulence in the company’s share price and implied volatility reading preceded news that the CEO of the company, which owns the Chicago Tribune and the Chicago Cubs baseball team, would resign. Internal shuffling occurred speculation rose over the fate of a $8.2 billion public-to-private deal for the company. This afternoon, its shares closed just .48% lower at $33.15, and after a 117.7% spike in implied volatility this morning, the reading has pulled back to 22%. With 96,500 options in play, it’s one of the day’s most active option families with calls outmoving puts by a factor of 4 to 1, veering toward the closest-to-the-money 32.50 strike in the December and January contracts.
MS – The market’s sentiment toward the financial space has made a return to the north-is-south, left-is-right approach following this morning’s gargantuan Q3 writedown from Morgan Stanley. Despite an admission of a $9.4 billion writedown and a net loss for the third quarter of nearly $3.6 billion, investors seem content to look the other way, instead applauding Morgan Stanley’s sale of a $5 billion stake to China Investment Corp in a bid to shore up capital. Shares closed more than 4% higher at $50.15 this afternoon. What a very odd development indeed – especially given the market dressing-down delivered to sector outperformer Goldman Sachs despite very strong numbers from that brokerage yesterday. With nearly 66,000 options in play, we observed brisk liquidity at the December 45/50 strangle, which is trading to buyers and sellers. Meanwhile, the January 55 calls have traded heavily to the middle of the market at around 50 cents a pop – a price reflecting a less than 1-in-4 chance that its shares can make a move past $55 stick through January expiration.
