Today’s tickers: SPF, CHB, JADE, LCAPA, BGP, TWX, VIX, BAC
Monday’s market action brought mostly muted trading volumes, with a surprising increase in November existing home sales providing a little confetti moment partway through the session. While the news brought marginal lifts to some homebuilding stocks, any positive gains were seen by option traders as cold comfort to a sector that has taken an unmitigated pounding in 2007.
CHB – Smallcap Champion Enterprises, a maker of modular and mobile manufactured homes, rose 2% to $9.54 following today’s existing home sales data. Looking back at Champion’s share price performance anno 2007 reveals a surprising end in positive territory – at least by a modest 2.4%. While open interest shows nearly 2 and a half defensive put positions open for every call – a more dramatic abundance of puts than in the larger-cap homebuilding tickers – our market scanners seized upon an increase in option volume of some 84 times the average rate, with calls trading at their most frenzied level since early October. While the 3,000 actively traded contracts were modest in absolute terms, they represent nearly a quarter of Champion’s total open interest, and appear lodged in long positions at the out-of-the-money January 15 strike. Selling for a nickel apiece, reflecting the miniscule probability that the market currently accords it landing in the money, this position supposes that little-homebuilder-that-could Champion can break its standing 52-week high of $14.58 within the next month.
SPF – Our scanners also detected brisk trading interest in options of homebuilder Standard Pacific, which caters to a broader demographic of homebuyers and provides mortgage financing and title services to boot . The 6-cent advance in its share price to $3.35 subsequent to today’s home sales data should be considered in the context of the company’s 52-week high of $30.40 – this is a truly distressed stock, and option traders appeared to seize the opportunity afforded by lower put prices to position against further downside in the early months of the year. Fresh long positions were entered in the February 2.50 puts, with traders readily forking over 50 cents to secure the right to sell Standard Pacific shares for $2.50 by mid-February. The ides of March look hardly better by the option market’s yardstick, with put spread activity in March puts between the 2.50 and 5.00 strikes.
JADE – Options activity in LJ International hit our option screens thanks to an increase in trading volume quadrupling the normal level. The action occurred against a 69% gain in its share price to $5.86. The Kowloon-based company is a maker of precious and semi-precious-stone-studded jewelry and accessories, and while the current share price is less than half its 52-week high, it appears that the calls are being bought on a scale 2 and a half times that accorded to puts. Noteworthy here is long straddle positioning in the January contract in anticipation of volatile price action in the coming weeks. The position’s combined $2.05 premium covers the buyer in the event of a break to the upside past $7.05 or below $2.95. Additional long positions in the January 7.50 calls appear to favor the upside risk.
LCAPA – All told, it’s been a solid year for Liberty Media Capital, the diversified holding company behind the Atlanta Braves baseball team, cable/satellite channels including the Game Show Network and Starz, and owner of minority stakes in MacNeil/Lehrer Productions and Rupert Murdoch’s News Corporation. Capping off a year in which its shares appreciated nearly 20%, outdistancing the broader consumer discretionary sector, its shares closed .97% lower at $116.61 this afternoon. Option volume, however, was stoked to more than 14 times the normal degree, thanks to fresh call activity in the January contract. Volume was credited to the middle of the market at strikes of 115 and 125, suggesting spread activity with a clear ceiling in terms of anticipated upside, into the month of January.
BGP – Last week’s revelatory price action in Amazon.com suggested the existence of at least some pockets of strength in an otherwise glum retail environment. Would that the outlook were as rosy for Borders, which has consistently gapped below click rival Amazon.com as well as brick rival Borders for the year to date. Options are moving at 4.6 times the regular level today as its shares closed 1.5% lower at $10.68. Interestingly, we observed similar volume spikes in mid-November, when traders appearing to favor fresh longs in the January and February 10 puts, bracing for a plunge into single-digit territory for the dog-eared Borders share price. This time around, traders are selling calls, albeit at higher strike levels, at the February 15 and May 12.50 lines, pocketing what premium can be had at those strikes in the confidence that both contracts will expire worthless.
TWX –Entertainment and communications giant Time Warner gained a bit of PR buzz over the weekend courtesy of the New York Times, which profiled the conglomerate’s rising profile along with the likes of Walt Disney in running virtual web-based communities for kids. While the article appears to have done little for Time Warner’s share price, which was down .90% at $16.50 heading into the close, it appeared that some traders were banking on Time Warner starting 2008 on the right foot, given the inclination to buy calls at the January 17.50 strike. These contracts were acquired for around a dime apiece today, reflecting a worse than 1-in-5 chance that Time Warner’s share price can make the 6% climb to break even by January’s expiry. The current share price is less than 50 cents above its 52-week low, but overall open interest shows nearly 1.5 calls open for every put, and implied volatility at 28.6% shows a 10% elevation above the historic reading.
VIX – Bleary price action amid thin volumes on the last trading day of the year sent volatility on an upward trek. The VIX Volatility Index registered a 7.6% gain in the final minutes of trading to read 22.82, still closing the year nearer its 52-week low of 11.21 than its alarming summertime high of 37.50. With only about 38,000 options trading this afternoon, the positioning nonetheless appeared to favor volatility-bullish January calls at strikes of 22.50 and 25, though this may be combined with put-buying at the January 20 strike in strangle combinations that would cover the buyer in the event of not just a break above, but below current volatility levels.
BAC – Shares in Bank of America edged back into black this afternoon, reading .66% at $41.33 as of the 4pm dispatch. With 250,000 options trading this afternoon, its options rated among the day’s most actively visited according to our market scanners, with twice as many puts trading as calls. After a 2007 which brought successive “kitchen sink” writedowns from the country’s leading financial institutions, delivered each time to a seeming chorus of “This could be the last time…” and then “Maybe the last time? I don’t know!” A look at the distribution of option volume today suggests that some traders are hedging their bets against call-side exposure in 2008 entirely and looking instead to the January ’09 calls, where calls at the 47.50 strike were mostly sold against a middle-market transaction at the 50 strike, currently pricing in a less-than 1-in-4 chance that Bank of America can make a pass at its 2007 high by next year’s January contract. Afternoon action saw huge volumes logged to January puts at the 50 52.50 and 55 strikes.
