Today’s tickers: YHOO, AOB, NTAP, CAT, LGF, MCD, VIX, MSFT, UXG
YHOO – Ahead of its earnings report tomorrow, shares in tech-space whipping boy Yahoo! slid 5.1% on the session to close at $20.82. With opinion split as to whether tomorrow’s earnings report will bring news of job cuts – news that could be bullish for a stock that has suffered in the eyes of investors for the perceived inaction of its executive management – today’s option action showed flagging confidence in the capacity of stock to pull out an upside surprise. Heading into earnings, the price of the front-month, at-the-money straddle implies a 13% up-or-down move factored into current premiums. Fresh volume was observed in the 22.50 calls, which were mostly sold despite the fact that this position lost 35% of its value simply by dint of Yahoo! lackluster price action today. We did, however, observe traders load up on longs in that 20.00 straddle, which at $2.90 will generate profit for the buyer upon an upside break past $22.90, or downside move below $17.10 – that’s 8% below the standing 52-week low.
AOB – Shares in Chinese small-cap American Oriental Bioengineering gained 4% to close at $9.45 this afternoon. The company specializes in the development of plant-based pharmaceuticals and nutraceuticals with roots in traditional Chinese medicine. No apparent news catalyst is behind today’s spike higher in its share price, but the ticker has been on the receiving end of some scattered stock recommendations as a compelling growth story-slash-China-play. Its share price, however, has declined about 17% over the past month. It appears that a trader may have taken the opportunity to adjust an existing volatility position in the January 2009 series from the 12.50 strike to the 10.00 strike. It appears that the $12.50 straddle may have been shorted back on December 26, when American Oriental Bioengineering shares were trading at $11.56, for a total premium of $6.20. The position was bought back today for $6.50 – a slight loss from the initial position, if this is indeed the case, and then a new short straddle was opened in the same contract at the 10.00 strike for a combined premium of $5.35. The trader in this case may be looking to avail himself of the fact that at 75%, American Oriental Bioengineering’s implied volatility is at a two-month high (making premiums costlier), taking advantage of the even richer time-value of the January contract, and the fact that even a lackluster start to 2008 only resulted in a $2 decline in the price of the underlying stock. This trader wants to prices and stagnancy level off – and is confident enough in his or her case to make the 30-cent per contract loss on the initial position worthwhile. The net volume of this trade sent overall option activity in American Oriental Bioengineering to 60 times the normal level.
NTAP – Options in Network Appliance, the maker of data management, scaleability and storage systems for large data centers, commanded 5 times the normal level of trader attention today. The action coincided with a 2.7% gain in its underlying share price to $22.83, and an apparent rush among traders to sell March puts at strikes of 22.50 and 25. This volume, occurring in excess of existing open interest, seems a pretty shrewd bet on further upside for NetApp shares, which are coming off a 52-week low of $19.58. Implied volatility actually notches in lower than the 51.4% implied reading, however, hinting that current premiums are pricing in less volatility risk out of its shares than it has already shown.
CAT – Caterpillar – A Bear Stearns upgrade of the world’s largest producer of construction and mining equipment sent its shares 3.4% higher to $68.18. Interestingly, the share price move elicited a rush to fresh positions in March 65 puts, which are trading to buyers and sellers with equal zeal on a volume of 28,000 lots – more than 10 times the existing open interest at this strike. With today’s premium ringing in at $2.70, a buyer of this position looks for a dip to $62.30 over the next month – just 4 percent above the 52-week low – while a seller takes the other side and predicts buoyant action above the $65 level for the next month. The interest in this single strike sent put volume to quadruple that of calls today – and a look at open interest also shows a slight privilege to the defensive puts by a factor of 1.1.
LGF – Option activity in Lions’ Gate Entertainment, the production company behind the latest installment in the Rambo franchise as well as Oscar faves “Away From Her,” “3:10 to Yuma,” and “Juno,” soared to 37 times the normal level today – the heaviest volume on record. Earlier today it was announced that Lionsgate had reached an interim agreement with the striking Writers’ Guild of America. Shares in Lionsgade gained .64% at $9.49 this afternoon. Implied volatility remained more or less stable today, with the 35% elevation above the historic reading intact for most of the duration of the strike. Today’s option volume, however, is wrapped up in 5/10 call spreads in the January ’09 and January ’10 contracts, possibly a trader rolling over the position from the 2009 contract into the 2010, with the $5 call entered as a long position for $5.45 against the sale of the higher call strike for $1.70. Closing out an existing call spread position in the 2009 would have given the trader $3.65 per contract to help defray the $3.75 debit cost of the 2010 trade. Lions’ Gate shares traded above the $11 level for most of the first half of 2007, but took a big hit during the market turbulence of August, and amid back-to-back earnings disappointments.
MSFT –Microsoft – Today’s news of a delay in the launch of its heavily touted SQL Server 2008 appears to have sent the software giant’s shares lower by .70% to $32.71. Option traders put more than 138,000 lots in play, with twice as many calls moving as puts. Call buying is in evidence in February calls at strikes of 32.50 and 35, with premiums down up to 36% on those strikes – possibly posing an attractive value to investors bullish on Microsoft’s share price outlook heading into the next month.
MCD – McDismal December sales from recession-portfolio favorite McDonald’s elicited a 5.6% drop to $51.06 in the price of the stock. On the option front, the 72,000 lots trading this afternoon made Mickey D’s one of the most active tickers on our platform. Implied volatility came off sharply, now within 1 percentage point of the historic reading – the lowest spread between implied and historic volatility since late-December. But with put-side premiums sharply higher given the slide in share price, the trend among option traders today has been to sell volatility via short positions in straddles and strangles at the $55 line, with puts attracting activity in the February contract at strikes as low as $47.50. The outlook in March does appear more bullish for McDonald’s however, as would seem to be suggested by call-buying activity at the $50 strike – the price of this position down 65% today, possibly presenting an attractive bargain to traders who still believe in the allure of the golden arches in a downtrodden economy.
UXG – US Gold – Shares rang in 21.5% higher on the session to $3.95, with options moving at 39 times the normal level, due in large part to fresh volume in the September contract at the 2.50 call strike. Interestingly, while open interest up to today numbered 2,802 lots (today’s volume, by comparison, totalled 3,525 contracts), open interest shows that 3.5 calls are open for every put. Implied volatility spiked some 18% on the session and now reads 148%.
VIX – This morning’s decline in December new-home sales provided no succor to traders looking for signs of a bottom in the housing market. Despite this new lurch toward economic slowdown, and without fresh clarity on expected rate action from the cloistered Fed, VIX volatility came off substantially, down 4.5% to read 27.78. Early market action showed traders still keen to sell volatility in the index, with calls at the 27.50 and $32.50 attracting most selling attention as prices on those positions were discounted around 12% on the session.
