Today’s tickers: CHK, CSX, ACLI, VIX, COF, WFC, ERIC, HLX, YHOO, MSFT, CFC
CHK – Shares of Chesapeake Energy Corp gained 1.3% to $38.20 today, possibly gaining tailwind from news that its chairman and CEO purchased nearly $7 million worth of the company’s stock over the past week. Oklahoma-based Chesapeake is the largest independent producer of natural gas in the United States. The move looks to have galvanized option traders to putting the equivalent of some 11% of its open interest into active trading, virtually all of it in the April contract, and much of it contrarian in nature. April puts were bought at strikes of 35, 37.50 and 30, while traders may have looked to take profit in calls in the same month at strikes of 37.50 and 40.
CSX – Transportation sector tickers have been a conspicuous favorite of option traders throughout Monday’s session. In addition to the elevated level of interest in Union Pacific (see below), options in North American railroad operator CSX rated among the 20 most active option families on our platform today. With shares down 1.2% at $49.32, the 34,000 options in play this afternoon have traded nearly 4 times as often to calls as to puts – representing the highest level of call-side activity in CSX in nearly a month. Some of this may be due to a bit of handsome profit-taking in January ’09 $60 calls, which traded to the middle of the market for $3.50. We think this may be the closing sale of positions opened on January 10 for $1.62 when CSX shares were nearly $6 cheaper, making those out-of-the-money calls a little less dear. Closing the position today would reap the January buyer a 116% profit margin. In the front month, meanwhile, calls at the 50 strike traded actively to the middle of the market at around $1.20 – open interest at this strike having doubled over the past week.
ACLI – Options in American Commercial Lines, the diversified marine transportation and shipbuilding enterprise, registered nearly 8 times the normal level of volume today. Shares in the company declined 3.8% to $18.59 after an analyst downgrade claimed the stock price was overvalued given its profit outlook. ACLI currently trades at 17 times its earnings – its next quarterly report is due out on Wednesday. The drop in share price elicited fresh positioning in calls at the $20 strike in the September and January contracts, however, which would seem to suggest that the downgrade hasn’t left traders begging off the upside. While its shares are up more than 14% for the year to date, the number of open call positions dwarfs that of puts by a factor of 6.6.
VIX – Today’s pullback in major indices after four days of gains sent the Volatility Index up 7% to 25.69. With most of today’s option volume in February calls at strikes of 25 and above, it’s clear that the watermark for volatility remains elevated, but we’d add the proviso that much of this volume is trading to the middle of the market, within already large pools of open interest, and with call-side premiums slightly higher. This would suggest that some players may be taking volatility-bullish positions off the board in anticipation of further relaxation in the volatility outlook. We also observed traders sell calls at the March 27.50 line, possibly looking to fund the purchase of puts at the same strike for $4.30.
COF – A UBS analyst downgrade of major credit card companies, citing increased credit losses emanating from a consumer-led recession, hit hard at card issuers such as American Express, Discover Financial Services and Capital One Financial Corp. The upshot was immediate in Capital One options, where implied volatility spiked some 19% to read 68%. With more than 35,000 options trading this afternoon, more than twice as many puts were traded as calls, as investors took a hasty, defensive posture following the downgrade. Shares in Capital One declined 7.8% to $52.50, as front-month activity showed an inclination to buy puts at the 50 and 55 strikes. Interesting positioning occurred in the March contract, however, where it looks like a trader may have entered a reverse collar using a 45 put and a 60 call to protect an underlying short stock position. Selling the 45 put for $1.95 to fund the purchase of the 60 call for $2.05 reduces the cost basis of the trade while protecting an underlying short stock position from a positive gain in the stock price.
WFC – An analyst downgrade appears to be the culprit behind today’s 7.5% drop in shares of Wells Fargo. Shares are currently trading at $31.14. In option trading, the decline was accompanied by a more than 19% advance in implied volatility to 48%. We continue to monitor this stock for evidence of dealmaking in the financial services sector, given the early-year slew of M&A speculation that had Wells Fargo as one of several possible takeover targets for JP Morgan Chase. Some of today’s option trading activity seems to corroborate that talk of possible dealmaking is still on the wind. Today’s most actively traded Wells Fargo contract is the April 37.50 call, which attracted decent buying interest at 50 cents apiece. The price of the contract reflects just a 17% likelihood of the position landing in the money come April, breaking past the standing 52-week high of $37.68 in order to do so. Front-month positioning favors the long volatility play, with traders buying the 32.50 straddle for $2.45 in anticipation of choppy price action above or below current price levels over the next month.
ERIC – Option volume in Swedish wireless giant Ericsson advanced to nearly 6 times the normal level today. This occurred as its shares slid more than 2% to $21.58 this afternoon – just a buck and change above the 52-week low of $20.37 it set back on January 23. A story in Barron’s today drew attention to Ericsson’s increasing price pressures it faces from the likes of tough international rivals like China’s Huawei and continued lackluster demand in Europe for its infrastructure upgrades, mobile infrastructure representing more than two-thirds of its revenue. With 5 times as many puts moving as calls today, traders appear to favor long positions in February puts at the 22.50 and 25 strikes.
UNP – On Friday the Wall Street Journal reported that railroad operator Union Pacific, topped its list for shares sold on strength, a tracker of stocks that registered price gains over the space of the session but also saw large outflows of money. The lack of enthusiasm for its near-term appreciation appears to have carried over into option trading today. Option activity in Union Pacific advanced to 4 and a half times the normal level today thanks to short strangle positioning in the March contract. With shares down 1.8% at $125.36, it appears that a trader sold short the March 125/130 strangle, accepting the $8.20 premium in the anticipation that Union Pacific shares wil remain hemmed in the current year-to-date range through March.
HLX – A 15% spike in option implied volatility to 46% for Helix Energy Solutions Group appears correlated to news of its CEO’s abrupt resignation. Shares in the Houston-based company, which provides so-called “life-of-field services” to offshore oil and natural gas producers, are down 3% at $36.50. Option traders have put the equivalent some 30% of its open interest in play, nearly 7 times the normal level of activity observed in the ticker. Urged on by uncertainty about the company’s future executive management, and the circumstances of the CEO’s hasty departure, option traders appear to be positioning long volatility via the at-the-money 35 straddle. The $3.20 price of this position today covers the buyer against a test of $38.20 to the upside or $31.80 to the downside, generating profit for the buyer once either of those price points are breached. Open interest heading into today had favored the bullish calls by a factor of 1.5. Helix is due to report earnings on February 26.
YHOO – Latest developments in the proposed Yahoo-Microsoft tie-up includes report-mongering from unnamed sources claiming that Yahoo is seriously considering an “alliance” with arch-rival Google that would allow it to fend off Friday’s hostile takeover bid from Microsoft. True to its management style of late, Yahoo executives are expected to bide their time mulling various scenarios – meanwhile, Google is expected to pressure U.S. regulators to take a closer look at possible antitrust implications of a Microsoft takeover of Yahoo. With more than 313,000 options trading this afternoon, we’re again seeing a heavy skew of traffic into the April contract, where some traders opted to take profit in calls at the 25 and 30 strikes given the marginal, 20% appreciation in premiums since Friday. Another trader positioned long April 20 puts, paying 30 cents toward the right to sell Yahoo shares for $20 in April – this possibly a cheap bet on the notion that Yahoo management might rebuff Microsoft entirely and try to go it alone, thus returning Yahoo shares to their subdued pre-Friday levels.
MSFT – Executives at Microsoft, meanwhile, remain convinced that their bear hug of a takeover bid won’t be given the brush-off by Yahoo’s management, and even surprised analysts by suggesting that the company might take on debt for the first time in its history to finance the $44.6 billion takeover. Shares in Microsoft are .33% higher at $30.54 this afternoon, and with more than 173,000 options in play, we observed traders sell March 31 calls for around a buck apiece, while buying February 30 puts for around $0.46 apiece. This would imply a largely static outlook for Microsoft shares over the next month as Yahoo mulls its options. Interestingly, though, as with Yahoo! we noted heavy traffic in the April contract, where traders looked keen to buy calls at the 32.50 line for 85 cents apiece. This gravitation toward the April contract may suggest optimism on the part of investors that Microsoft will emerge the stronger suitor with a deal sewn up by springtime.
CFC – Shares in mortgage lender Countrywide Financial lost more than 6% of their value to read $7.13 this afternoon. Earlier today it was reported that consumer advocates in California and at least three other states plan to meet with Senate leaders today about Bank of America’s proposed takeover of Countrywide, hoping to secure new loans for borrowers facing foreclosure once the deal goes through. With more than 161,000 options trading this afternoon it appears that some recalibration of positions in the January and July contracts is occurring at the 5.00 put and 7.50 call strikes, involving 35,000 lots at each strike. In both contracts, the puts were sold and the calls bought – a strategy that at least on the surface suggests the closing out of bargain-basement defensive positions while implying very limited upside prospects for Countrywide into 2009.
