Today’s tickers: TSO, PG, KO, MCD, CFC, BAC, AXP, MER JNPR, MU
TSO – Shares in oil refiner Tesoro were down 6% this afternoon following an analyst downgrade of the company. The current $37.79 share price is still $6 better than the company was doing exactly a year ago today – and this despite a squeeze for oil refiners due to gapping oil and gasoline prices that has cost Tesoro 30% of its market capitalization over the past 3 months. Implied volatility rose 17% on the session to peak at 63% this afternoon – a remarkably stilted elevation above the 39.5% historic reading. Given this heightened volatility outlook, traders today appeared willing to make contrarian bets on share price gains for Tesoro over the next week, scooping up fresh long positions in January 40 calls – perhaps encouraged by the fact that these calls are 65% cheaper today than they were yesterday. May calls were also especially active, with fresh buying at the 45 strike.
PG – Our observation earlier this morning of an unusually skittish, defensive tone to option trading in defensive, consumer-staple stocks extended this afternoon Proctor & Gamble. Shares in the producer of Pampers diapers and Tide laundry detergent slid 3% this afternoon to $70.29. Implied volatility vaulted 24.3% higher to 31.1% – this compares to a 15.4% historic level and the highest reading on our books. Almost one in five contracts trading in Procter & Gamble this afternoon was a long January 70 put, a position whose price ballooned 300% this afternoon, but which would protect the buyer against a decline in Procter & Gamble shares below $68.75 over the next week. February puts were also freshly active, with traders opening new positions at strikes of 65, 70 and 75.
KO – Given the abundance of recession talk in the market this week, and the growing exodus toward more defensive stocks – indeed, this afternoon’s 240-point drop in the Dow would seem to bear this out – we were baffled to witness a 2.8% decline in shares of Coca-Cola. This is a company that would seem to benefit from not just the consumer staple angle, but also its prodigious international exposure and weak-dollar defensiveness. The current share price of $63.72 is still near multi-year highs, but this afternoon’s action found three times as many puts moving as calls, much of it wrapped up in fresh buying in January 65 puts, which are due to expire in a week. Buying interest in this stock extended to the same strike in the February contract. The put-call ratio of .90 continues to favor the bullish calls, but is still the highest proportion of defensive puts to calls in at least a year. Implied volatility is likewise curiously elevated at 23% – a sign that option traders are looking for 31% more turbulence price action in this would-be “recession-proof” stock than its shares have shown historically. This may have been a spillover reaction to an analyst downgrade of European food companies Unilever and Diageo – possibly anticipating a downturn in profits for European food companies, which would hit a sore spot with import-dependent beverage giants like Coke.
MCD – The defensive action extended to another defensive – or “recession-proof” stock. Options in McDonald’s traded at 8 times the average volume today as its shares declined 6.5% to $54.39. The move followed an analyst report indicating that McDonald’s pole position among low-priced eateries may already be baked (or make that, deep fried) into its share price, and indicated that same-store sales figures would likely fall in step with price cuts in casual dining trains or an upswing in the economy. Earlier this week McDonald’s announced plans to take on takeaway coffee giant Starbucks in the realm of coffee beverages – a move that elicited predictions from many observers that the golden arches would triumph. Implied volatility in McDonald’s options jutted 32% higher to 37%, the highest level on record according to our data. At-the-money calls at the January 55 strike were bought heavily, possibly some in connection with puts bought at the same strike in a straddle combination that given $2.35 would allow the buyer to profit from a break past $57.35 or below $52.65.
CFC – Today’s confirmation that Bank of America will acquire troubled mortgage lender Countrywide sent its shares 16.5% lower to $6.47. Across the market, observers rushed to parse terms of the agreement for a clue as to how close Countrywide came to flatlining before the big bank swooped in to resuscitate. Options in Countrywide are trading at twice the normal level today, and with more than 540,000 options in play it was the most active option family on our platform by a longshot. Option implied volatility came off more than 60% earlier today to 67.4%. Once again today’s activity was strongly localized in Countrywide’s densest position by open interest, the January 5 puts. These traded to the middle of the market at around a nickel apiece, having lost 66% of their value since yesterday. Puts at the 7.50 strike also sold off heavily, while we did detect willingness to buy calls at the 7.50 level, despite the fact that Bank of America’s deal values Countrywide shares at no more than $7.16 per share.
BAC – While implied volatility (and interestingly, its share price) came down for Countrywide, the plot thickened for its rescuer. Uncertainty about Bank of America’s prudence in taking on the liability of Countrywide’s troubled mortgage book is apparent from a look at its implied volatility reading, which at 43.8% is the highest it’s been since late-November. This indicates that option traders are pricing in about 25% more volatility in Bank of America’s share price than it has shown historically. Heading into the close, Bank of America shares were 1.6% lower at $38.65. At least some option traders took the opportunity to profit from the ambiguity by selling the January 40 straddle, taking the premium of $2.00 in anticipation that its shares will level off in the coming days. Others took a different approach – betting that its share price will malinger, rather than linger, below the $35 level, by buying puts at that strike.
AXP – Shares in the country’s third-largest credit card issuer, American Express, slid 10% to $43.99 this afternoon, setting a new 52-week low after boosting its Q4 loan-loss provisions amid rising delinquencies and a slowdown in consumer spending. The company warned that Q1 earnings are likely to fall short of street estimates. American Express options traded at 2.6 times the normal volume this morning against the backdrop of the share price decline, with January spread activity in force.
MER – Shares in Merrill Lynch gained nearly 5% this afternoon to read $54.59 heading into the close, despite premarket reports that the company may swallow a new $15 billion writedown. A Bloomberg report indicated that this latest writedown would sink Merrill’s shareholder equity to well below that of its rival Goldman Sachs. With 217,800 options trading this afternoon, Merrill Lynch was one of the most active tickers on our platform this morning, with heavy activity in January puts at the 45 and 55 strikes, and in calls at the 55 strike. This may be evidence of put-spreaders or straddle traders staking their bets ahead of Merrill’s is earnings report on Tuesday. The $3.95 price of the at-the-money straddle today indicates that option premiums are pricing in a 7% up-or-down move for Merrill’s shares when it reports earnings next Tuesday.
MU – Options in semiconductor maker Micron Technology, the producer of mobile DRAM chips used in wireless handheld devices, hit our “hot by option volume” scanner today after a surge in volume to more than double the normal level. Despite trading 1% higher this morning, bucking the trend in the Semiconductor Holders Trust (SMH), its shares were down by a like amount this afternoon to close at $6.13. Like its battered sector peer AMD, Micron is a company whose share price has done the downward dog over the past 52 weeks. The volume we observed in February 6.00 calls traded mostly to buyers, however, on volume of 24,600 lots, where prior open interest read only about 13,300 contracts. Implied volatility rose 15% on the session to exceed 73%, indicating a belief on the part of buyers that its share price is likely to show dramatic movement in the coming weeks – possibly with the skew to the upside.
JNPR – Shares in Juniper Networks, the second-largest maker of network infrastructure equipment, dropped 13% this afternoon to $26.70. Yesterday the company announced the defection of its chief operating officer, a key architect of the company’s ongoing turnaround, to Microsoft. Options in Juniper traded at more than 3 and a half times the normal level, according to our “hot by options volume” scanner. Implied volatility rang in 17% higher on the session to read 59%. A look at the time shows some option traders shielding themselves from further declines in Juniper’s share price by buying puts at the 25 strike, while others may be bracing on volatility in either direction of the two strike prices by combining this long put position with a long call at the 27.50 strike. Evidence of fresh shorts in the February 27.50 puts as this position became 220% richer overnight attests to an anticipation that share price decline may decline – along with the volatility reading – into the month of February, even as that month’s contract coincides with earnings on January 24.
