Today’s tickers: XLK, PRU, NIHD, M, CSCO, RTH, JCG, OMX, NMX, MSFT, YHOO
XLK – A confluence of market-moving events in the tech space – from Cisco’s skittishly anticipated earnings to the next verse in the takeover ballad of Microsoft/Yahoo and its implications for Google – elicited a not- surprising level of interest in the Technology Select Sector SPDR. All of the aforementioned companies are components thereof. While shares in the ETF closed 1.4% lower at $22.26, it appears that traders are positioning for a notch lower in the value of the fund’s shares in June. This was done through fresh selling in June 24 calls, which were shorted around 85 cents apiece, propelling overall option volume to 17 times the normal level, which is how it came to appear in our market scanners today. XLK shares have traded at an average price of $23.81 for the year-to-date, so shorting that call could more readily indicate an expectation of shares remaining at-or-around the current average price into June, making that $24 call not worth exercising.
NIHD – Interesting call spread plays characterized the action in NII Holdings, the Latin American mobile communications service provider. Activity involving about 15,500 lots in the March contract at strikes 45 and 50 propelled call volume to 7 times the normal level. This occurred as shares in the company held on to a .69% gain on the session to $39.52 on no apparent news catalyst. In a classic bull call spread strategy, the trader bought the March 45 calls for about $2.00 while selling the higher-strike 50 calls for $1.05, initiating the trade with a debit of $1.00 in the expectation of a 12% advance from current share price levels, not to exceed the $50 strike implicated by the sale of the higher-price call. It bears noting here that NII Holdings shares broke below $50 on December 12 and have since declined 17.8%. The rise in share price suggested by the activity of today’s call-spreader is relatively minor for a stock that has traded as high as $90.43 over the past 52 weeks, but using out-of-the-money strikes to express the view does speak of real confidence in an upside move.
PRU – Option traders are positioning for a big earnings-related move in shares of Prudential Financial Inc., the real estate brokerage and retirement and insurance product giant. Shares in the company closed 1% lower at $77.40 ahead of the after-the-bell earnings announcement, but its options commanded 5 times the normal level of trader interest. The mood appears to favor a whiplash move in its shares, given the degree of long interest in the at-the-money February 80 straddle. The $6 price tag of this position ahead of earnings suggests about a 7% up-or-down price move on back of the earnings report, with the long-volatility scenario extending into the March contract, where it looks like traders may be entering long positions in the 70/75 strangle combination, paying $8.84 to position for a move to the upside past $83.84 or down below $61.16 – that’s a 22% spread between the break-evens on next month’s strangle.
M – Shares in department store giant Macy’s plunged 4.6% this afternoon after the company announced plans to amalgamate 3 sales division, cutting more than 2,000 jobs, and offered Q4 earnings guidance that fell short of street consensus. With shares at $23.94, we observed fresh buying and selling in the February 25 puts, possibly in combination with 22.50 calls in a strangle combination. Puts at the March 22.50 strike were bought more than 3,000 times at around $1.25 apiece, a position that only begins to yield a profit for the buyer if Macy’s shares dip to within 50 cents of the current 52-week low over the next month.
CSCO – Option traders have heeded the past lessons of Cisco, one quarter after allusions from its CEO to a drop-off in US corporate IT spending overshadowed better-than-expected earnings, sparking a massive, 9% sell-off in its stock that infected other tech tickers as well. Heading into today’s earnings announcement, Cisco shares are trading about $6 off November levels, closing .47% lower than yesterday at $23.16. With more than 523,000 options in play, traders mindful of Cisco’s vulnerability to sales forecasts are positioning long volatility via the February 22.50/25 strangle. The price of this position at $1.02 offers relatively cheap exposure to a break below $21.48 or above $26.02. The same strategy has been deployed in the March contract, where the $1.72 spread implies an even broader break out of the range of the strike prices. Current front-month premiums reflect the market’s expectation of as much as a 9% up-or-down move on back of earnings.
RTH – Tomorrow’s release of January chain store sales will provide a telling snapshot of that 10% of all U.S. retail activity that is rooted in its ubiquitous mass-market franchises. Ahead of the numbers, options in the Retail HOLDRs Trust (RTH), whose components include Wal-Mart, Home Depot and Amazon.com, rate among the top 20 most active option families on our platform. Last Thursday, an analyst report forecasting that tax rebates and Fed rates would trickle down favorably to lower-end consumers and boost chain-store sales, resulted in a doubling of call volume on the RTH. Today, we saw a similar spike in bullish speculative activity in the RTH – this time involving puts. Shares reversed early gains to close 1.7% lower at $89.56. An early-session drop in put-side premiums didn’t inhibit traders from looking to sell short puts at the February 90 strike for around $1.15. Later in the day, buying interest in the same strike picked up even as the price of the position increased. The resulting volume totalled more than 5.5 times the open interest at that strike.
JCG –J. Crew Group – Despite early signs of a bullish bent to trading in the chain-store retail space, the mood faded for another catalogue retailer. We were interested to observe an acceleration in option volume in preppy clothier J. Crew to 3 times the normal level against a 2% decline in its share price to $40.82. The company is due to report earnings on March 13, so any earnings-related plays would likely be consigned to the March contract, but today’s volume was roundly situated in February 40 puts, which were bought for $1 apiece on volume 4 times the open interest. J. Crew’s current share price represents a 25% premium on the 52-week low.
OMX – Shares in OfficeMax, the country’s third-largest office supplies carrier, closed 3.8% lower at $21.84 today. Last week, OfficeMax shares registered their highest reading in 6 weeks on no apparent news catalyst, and it appears that some traders may be playing on the flukiness of the occurrence by entering bear call spreads in the May contract. In the case of today’s trade, it looks like a trader bought 10,000 lots of out-of-the-money May 27.50 calls for $1.00 while selling a like amount of 22.50 calls for $2.70. The result is a so-called credit spread in which the trader doesn’t mind limiting the maximum profit to the $1.70 opening credit – times 10,000 lots in this case – realized if OfficeMax shares pull back below the price of the lower strike by expiration. OfficeMax options traded at 35 times the normal volume today.
NMX –A U.S. Justice Department briefing released yesterday suggested that self-clearing financial futures markets could pose a threat to open competition. The briefing immediately cast fresh scrutiny on the regulatory approval of CME Group’s bid to buy the New York Mercantile Exchange, and we’re seeing the upshot of that doubt today in a 17% decline in the value of Nymex Holdings, owner of the would-be takeover target. With shares at $88.15, Nymex Holdings options showed a 60% spike in implied volatility, with fresh buying in February put strikes as low as 80 and 90 reflecting aptly on the state of the market’s mood. We did, however, observe fresh buying and selling in February calls at the 90 strike, suggesting that volatility may be in force, with traders taking advantage of the 10% more anticipated price risk in Nymex shares over the next month to buy and sell straddles and strangles at close-to-the-money strike prices. Heading into today’s selloff, option traders held nearly twice as many open call positions as puts in Nymex Holdings.
MSFT –Microsoft – The saga continues, meanwhile, in Microsoft/Yahoo. Shares in the software giant closed 2% lower at $28.50 this afternoon, with 212,500 options trading actively by closing bell. Mood in the front month contract shows traders eager to buy February 27.50 puts for around 23 cents in possible anticipation of further price haggling and regulatory pre-emption of its Yahoo takeover. In all, puts are out-trading calls by a narrow margin, contrasting directly with the overweight of open call positions in its overall open interest stakes.
YHOO – Yahoo! – Shares slid 1.6% lower to $28.51, still stubbornly below that $30 threshold. But while this afternoon’s 115,000-strong volume showed 3 and a half times as many calls moving as puts, the volume did not appear to show resolute expectation of a higher price bid out of Microsoft. Heavy traffic in March and April calls at the at-the-money 30 strike is trading to the middle of the market, and on volumes well within existing pools of open interest, suggesting that some traders may be paring large positions at those strikes rather than positioning baldly for directional upside.
