Today’s tickers: MO, UST, YHOO, XLF, DELL, RMBS, ETFC, CCU, HWAY, BID
MO, UST – This morning’s earnings report from the world’s largest tobacco producer, Altria Group Inc., confirmed speculation that the company will spin off its international unit, acquiescing to shareholders who have demanded higher dividends. Philip Morris International currently accounts for two-thirds of Altria’s total profits, so the loss of the international unit will force the company’s US division to resort to innovative tactics to make up the difference. With US cigarette sales consistently falling, the obvious choice for Altria is to branch out into the $3.7 billion per-year market for smokeless chewing tobacco, which is growing by 6% annually – and which is dominated by UST, the maker of Skoal and Copenhagen brand chews.
Interestingly, as Bloomberg news reported yesterday that Altria would likely turn its attentions to the US snuff market, we observed a 10% spike in implied volatility in options of UST – which is currently sitting on three-fourths of the market for smokeless tobacco. Bloomberg reports that Altria is already in the process of conducting tests in Atlanta to determine whether consumers would be receptive to Marlboro-brand chewing tobacco. After news of Altria’s overseas unit spinoff was made official this morning, option traders saw the writing on the wall and sent option volume to more than 7 times the normal level, with puts trading at three-month highs, outnumbering calls by 3 to 1. A somewhat defensive view for UST shares was in evidence through put-spread plays in the February contract between strikes 55 and 60, with traders selling the 55 puts against the purchase of the 60 puts. Shares closed 3.5% lower at $53.22, with the current share price representing a 10% comedown from its 52-week high.
Altria shares, meanwhile, gained 1.1% to $76.96, and with 68,000-plus options trading it was one of the most liquid option families on our platform. Twice as many calls traded as puts as implied volatility has come down sharply, off 20% from pre-earnings levels. Heavy traffic was evident in February 80 calls, and again in the 75 puts. Total open interest shows 1.8 call positions open for every put.
YHOO – Yahoo! – A disappointing 2008 outlook coupled with news of very limited downsizing measures failed to satisfy a market weary of Yahoo’s executive malingering. Shares closed 8.4% lower this afternoon at $19.00, with 292,000-plus options trading more than three times as often to calls as to puts. Much of the early session front-month volume was characterized by selling in the 22.50 calls, and two-way traffic at the February $20 straddle. In the March contract, some rankly pessimists even saw fit to buy puts at the March 15 strike, where the 24-cent premium reflects only about a 10% probability that Yahoo shares will stoop to such a low in the next month. As we’ve observed previously, the only chatter that seems to generate momentum in Yahoo’s out-of-the-money calls these days is speculation of the takeover kind. Even option traders seem to have lost patience with the company’s measured approach to strategic announcements and piecemeal reorganizations it continues to eat dust from the likes of Google.
XLF – Financial Select Sector SPDR– Shares in the financial sector ETF, meanwhile, closed 1.3% lower to $28.19, sloughing off gains the immediate aftermath of a 50 bp Fed rate cut. With more than 630,000 options trading this afternoon, we noted traders continue to sell calls in the front month contract at strikes of 28 and 29, after a good deal of defensive put-spread plays in the hours and minutes preceding the Fed announcement. These put spreads were observed at the February 26/28 strikes, and again in the March contract at strikes 27 and 30, evidence of moderate bearishness on the sector at large.
DELL – Dell Inc. – What’s cooking at Dell, we’d like to know…? A .83% decline in the computer maker’s share price to $20.39 coincided with some 61,000 active option contracts, making it one of the top-20 most heavily trafficked tickers on our platform today. Dell is due to report earnings on February 28, making positioning in the March contract appropriate for those looking to capture a big share price move. Implied volatility at 38% is still well below the 47% historic reading, and with shares still loitering within $2 of the 52-week low, it looks like a trader availed himself of lower premiums to position long the 20/22.50 strangle in anticipation of the earnings report.
RMBS – Shares in chipmaker Rambus, whose processors are used in the Sony PlayStation 3 game console, advanced more than 17% to $19.41 this afternoon, on analyst reports that it could collect royalties of up to $10 billion if a patent infringement ruling it won against South Korea’s Hynix is upheld next month. Implied volatility soared 35% on the news, and now at more than 96% shows option traders pricing in about 55% more price risk in Rambus shares over the next month than has been evident over the past year. With 4 times as many calls trading as puts, it wasn’t hard to finger the bullish pulse of traders seeking upside exposure at the February 20 and 22.50 strikes, extending into the March contract as well. But there was a streak of skepticism as well, as a trader sought fresh short positions in the August 20 calls. With the value of this position more than doubling overnight, a trader sought to pocket the $3.40 premium, expecting that call-side premiums will deflate over the next several months if the initial ruling is overturned, or if the spoils of a judgment in Rambus’ favor are less extravagant than current reports suggest.
ETFC – Shares in E*Trade Financial gained 9.6% in afternoon trading to read $4.54 on news that the company’s CEO, its chairman, and other board members bought nearly $2 million in stock. E*Trade shares, which suffered a cataclysmic decline on back of losses suffered on exposure to mortgage-backed securities. Shares have recouped 28% for the year-to-date – cold comfort for a stock that traded as high as $25.79 before its late-autumn crash-and-burn. But reports of the insider buying were enough to stoke interest in calls at the 4.00 and 5.00 strikes in the February, March, and April contracts, suggesting a possible return to late-November levels into the spring. Nothing in the buying action or the momentum of E*Trade’s options today suggests a new confidence that a buyer for the ailing online brokerage might be forthcoming.
CCU – Shares in the country’s largest radio station owner, Clear Channel Communications closed .45% lower at $29.04, paring earlier gains that followed positive (if vague) scuttle on the outcome of its pending buyout by private equity groups Bain Capital and Thomas H. Lee Partners. While the public-to-private $19.5 billion buyout was approved last week by the FCC, yesterday, Standard & Poor’s upheld its B+ (junk) corporate rating on Clear Channel “with negative implications.” Earlier this morning, Barron’s ran a story putting low odds on a completed takeover deal. It’s this uncertainty over Clear Channel’s fate that has kept implied volatility so exorbitantly high. At 98% its estimated price risk over the next month is more than twice the historic volatility reading. Still, the uptick in its share price today was enough to generate traffic in February calls at the 32.50 and 35 strikes. Evidence of a less rosy outlook for Clear Channel shares was observed in the April contract, where it looks like bear put spreads were deployed between the 20 and 30 strikes – evidence of bearish sentiment, to be sure, while using a put spread to keep trade costs down in a high-volatility environment.
HWAY – Healthways Inc – A 15 % decline in the share price of this health care plan administrator to $56.06 sent option volume to nearly 10 times the average volume. The move followed a Credit Suisse recommendation to short Healthways shares. With premiums at this strike level down 80% on the session, traders scooped up long positions in March 60 and 65 calls at around $1.50 apiece, possibly playing against the trade recommendation and signaling confidence in a near-term recovery for its share price.
BID – Sotheby’s- Shares in the venerable auction house closed 2% at $28.94 this afternoon. Options traded at more than twice the average volume, thanks largely to unusual volume in the July contract at the 22.50 puts and 35 calls. All of these options traded to the middle of the market, making directionality slightly unclear. The volume may be evidence of a collar strategy, with the trader buying the 22.50 puts and selling the 35 calls to protect an underlying share position. Or it could be a strangle combination, where the $4.80 combined premium would wager on a break above $39.80 or below $17.70 by July’s expiration. If that seems like an extreme swing, remember the first week in November, when Sotheby shares lost 35% of their value on concern that a US economic downturn would squelch the appetite for luxury goods at auction.
