Today’s tickers: PDE, AOB, DTV, EWH & DDS
PDE – Pride International Inc. This oil drilling specialist services company appears as one of our hottest options families by volume today as it appears that an investor continues to build a substantial position in deeply embedded call options. Share are higher by 2.1% at $33.40, but on further examination we note a build on 50,000 lots of open interest in the January 2009 calls at the 20 strike from last week. Those calls were bought at 13.40 one week ago and today’s action involves a similar amount of calls at 14.15. Although this could be profit taking following the company’s recent monthly report on its 2008 capital budgeting, we’re going to stick our necks out and make the bold assertion that some investor is banking on a run up in the stock and finds deep-in-the-money calls as a convenient way to do so.
AOB – American Oriental Bioengineering shows unusual but significant option volume Wednesday. With shares trading up 1.3% at $11.33 we have observed option volume of 53,000 contracts trading representing 40% of current open interest. The activity involves the January 2009 series where the 10 calls were sold 13,900 times, while the 10 puts were bought in roughly the same amount. That strategy would result in a net credit of 1.50 per contract. However, we also observe open interest at both of these strikes, which could indicate that an investor is closing a long call and short put combination. Such a position appears to have been build in early November at a net cost of 2.70. It could be that judging by the almost identical volume at the 12.50 strike, the investor is rolling the position to a higher strike. We can’t tell in which direction this combination trade was placed since both call and put were dealt at mid-market prices. What we can say is that the net cost if this was a replacement strategy was at 1.10 with calls costing 2.5 and puts perhaps sold at 3.60.
DTV – DirectTV Inc. Despite a 1.1% decline in its share price today to $23.94, a bullish option play is flashing red on our screening devices today. Given the current existing open interest of just 5,161 contracts in the January 2008 22.5 puts, today’s 9,686 lots transacted to the sell side at 0.30 premium indicates some investor confidence that a floor may be in place for shares at this digital and cable television provider. Over the course of the last two months shares have attempted the downside and found strong support at around $23.50. The early November all-time high at $27.00 and change has possibly set the tone for an investor wanting to take in premium today in the hope that the shares won’t slip by a further 6% between now and expiration.
EWH – iShares MSCI Hong Kong shares are marginally higher on the session at $22.26 and we think we’re looking at a bearish option play involving 10,000 lots of both calls and puts. We can see the purchase of the puts at 0.30 clearly using time and sales, but the fact that the calls traded to the middle of the market makes us wonder whether this was a strangle or a pure bear play. However, one clue is the fact that the premium on the calls was very much closer to the existing bid price making us suspect that out-of-the-money 23 strike calls were used to fund the purchase of put the deeper-out-of-the-money 21 strike puts for a net cost of just 2 cents. Neither call nor put shows any material current open interest as yet making this a fresh play on Hong Kong stocks.
DDS – Dillards Inc. There is no shortage of reports providing anecdotal evidence of a weak sales season for retailers. Shares at bookstore Dillards are 5.5% lower at $19.19, yet the option activity stacking up to 15% of current open interest appears on the call side today. With the company’s market capitalization slipping to around half of its early summer worth, option investors are paying up for January calls at both the 20 and 25 strike. Investors clearly have more confidence in the near future than option market makers who currently assign a 5% risk that Dillards will recover the last $5 slip in its shares. Call options conveying that right to buy shares at $25 are changing hands at a dime, while an investor paid 0.95 earlier for over 1,000 calls with rights to purchase the stock at $20 by January.
