Today’s tickers: MFE, ITU, SPLS, CNET, AGN, AMKR, NT, AMZN, CTSH, GMXR
AGN – Shares in Allergan, the maker of Botox wrinkle filler, tanked 6% to $63.20 on Friday on news that the FDA will pursue a safety review of Botox and a competitor, Solstice Neuroscience’s Myobloc, following reports linking the drug to sometimes-fatal cases of botulism in young patients. The fatalities are said to involve children treated with the drug for limb spasticity, a symptom of cerebral palsy, outside the United States. Today’s activity showed fresh put buying in February and March 60 puts, that latter strike increasing more than 200% in value overnight. Heavy traffic in February and March 65 calls suggests that a good deal of today’s traffic was volatility positioning, seizing upon the risk of either further unspooling or a snap back upward for Allergan shares. Interestingly, open interest in Allergan favors the defensive puts by a factor of 1.4, despite the fact that Allergan shares have delivered 22% positive returns over the past six months, outperforming the S&P 500 by more than 13 percentage points. Allergan recently announced a partnership with cosmetics giant Estee Lauder on a new line of skin-care cosmeceuticals to be marketed exclusively in doctors’ offices.
MFE – Shares in McAfee, the world’s second-largest maker of anti-virus software, closed 9.2% higher at $34.65 after the company’s Q4 earnings and sales guidance bested street estimates. Speaking with Bloomberg News today, the company’s CEO attributed McAfee’s resilience in a market that has been unforgiving for tech companies to the fact that malware activity is on the rise globally, making online security solutions a continued priority. McAfee ventured on to our market scanner owing to a rise in option volume to 6.5 times the normal level. And while most of this volume is trading in puts, we were taken aback to notice some contrarian positioning in February 35 puts. These were bought on a volume nearly 6 times the open interest at that strike, and with the premium now 63% cheaper than it was yesterday, it looks like some traders may have seized the opportunity to scoop up protective puts at a bargain to shield gains realized in the share’s rally from another pullback in the share price. The fact that this concurred with selling in the February 35 calls suggest that option traders are wary of much more upside for McAfee.
SPLS – Options in Staples, the world’s biggest seller of office supplies, traded at nearly 7 times the normal level today, as its shares closed .31% higher at $22.95. On Thursday the company announced that it was ceasing its 11-year relationship with Indonesia’s largest paper producer, Asia Pulp and Paper, due to the company’s deforestation practices. It appears, however, that today’s option volume may be advance action on Staples’ upcoming earnings report on March 4. Staples has guided EPS at $1.43 per share, and while the company surprised to the upside last time out, today’s 2:1 ratio put spread activity in the March contract suggests traders positioning for limited downside in its share price post-earnings. In this case the trader sold 2 of the March 20 puts at $0.45 apiece against the purchase of 1 22.50 put at $1.20.
ITU – American depositary receipts in Banco Itau Holdings, Brazil’s second-largest private bank after Banco Bradesco, closed .67% lower at $20.81. The company is due to report earnings next Tuesday. Despite the immediacy of the earnings release, it looks like the majority of Friday’s activity was tied up in short strangle activity in the June contract between the 20 and 22.50 strikes. If this is indeed the case, the trader in question sold puts at the 20 strike for $2 along with calls at the 22 strike for $1, accepting the $3 premium in the expectation that Banco Itau shares will remain bound between the range of the strike prices heading into June expiration. This activity was enough to push option activity to nearly 28 times the normal level, with the options involved equalling more than a third of its open interest. While Banco Itau shares have traded as high as $29.36 over the past 52 weeks, the average share price for the year to date is $23.01. Open interest shows twice as many put positions open as calls.
CNET – Shares in technology and entertainment company CNET Networks gained nearly 8% to close at $8.29 on Friday afternoon. Option activity showed an early, massive spike in volume to some 35 times the normal level as implied volatility spiraled more than 80% to 106% on unsubstantiated deal rumors invoking the name of Google. Fresh call-buying in February, March and April $10 calls is consistent with the activity of a rumored takeover target. We wonder, however, if the rumors might have originated with call holders who were left in the lurch when CNET’s spike in Q4 profits, reported earlier this week, was resoundingly trumped by soft guidance for the coming quarter. Those February 10 calls, which traded heavily at 20 cents ahead of the report on February 5, decimated in value to 5 cents as CNET shares melted on guidance. Today, those February 10 calls have recouped their pre-earnings value and the rumor momentum has sent traders flocking to the same strike in the March and April contracts to boot. Let it be said however that CNET is a favorite haunt for call-buyers – traders hold 3 times as many call positions as puts in the company.
AMKR – Shares of Amkor Technology, whose semiconductor assembly, packaging and test services are outsourced by chipmakers worldwide, rose 3.6% to $8.23 in afternoon trading. The stock has enjoyed positive analyst attention in recent sessions ahead of its earnings report next Wednesday, and trader anticipation of the numbers has sent implied volatility to more than 72%, indicating a slightly higher risk to its share price over the next month than is inherent in its 69% historic reading. Despite the near-term price risk, today’s surge in option volume to 9 times the daily average appears to involve some reverse-collar activity in the June contract. A buyer of a reverse collar would do so to protect a short position in the underlying stock by buying a call – in this case, the June 10.00 call for $0.70 – and funding the purchase with the sale of the 7.50 put for $0.95.
NT – Option activity in Nortel Networks, the telecommunications services provider, bounded in early trading to more than twice the normal level. Shares closed a sliver lower at $10.96. It would appear that traders took the opportunity afforded by relatively flat share price movement today to position with tempered bullishness in the March contract, coinciding with the release of its earnings on February 25. They did so via ratio call spreads in the March contract, buying 1 of the March 10 calls at $1.70 and defraying the purchase by selling 2 of the 12.50 calls for $0.50 apiece to position for very moderate share price appreciation in connection with earnings. Implied volatility at nearly 64% shows current premiums reflecting about 23% more price risk to Nortel shares over the next month. A buyer of this call spread may be skittish about the possibility of downside given the current volatility reading.
AMZN – Shares in online all-you-can-buy store Amazon.com powered 3.7% higher to $73.52 after the company reported plans to stage a $1 billion share buyback – totaling 3% of its total outstanding stock. With some 62,000 option contracts trading as of the noon hour, it’s one of the most active tickers on our platform today. We feel compelled to note, however, that the mood among option traders was rather more ambivalent than Amazon.com’s share price action today would suggest. Heavy traffic in February puts traded to buyers and sellers as put-side premiums came off, and it looks like some of this was involved in strangle plays with the 75 calls. It’s worth wondering whether the turbulent tinge suggested by front-month volatility plays might have something to do with those early reports suggesting that Microsoft’s bid for Yahoo! was an ingenuous ploy to stave off a Yahoo alliance with Amazon. Nonetheless, traders bullish on Amazon.com’s share buyback went on to stake fresh bets at the March 80 strike, which traded for $2.38 today on a volume 3 and a half times its open interest. Just to break even on that strike, Amazon.com shares have got to appreciate $9 more between now and March 20. Current premiums reflect a less than 1-in-3 chance of that happening.
CTSH – Cognizant Tech Solutions Inc – Shares gained 16.7% to $31.86 after the IT solutions service provider forecast higher quarterly earnings due to higher outsourcing demand from companies cutting back on regular staff. Options traded at 3 times the normal level, with traders buying and selling February and March 30 calls and buying calls one strike higher at 35.
GMXR –GMX Resources – Shares in this independent oil and natural gas explorer gained 2% to close at $26.00 this afternoon. Earlier this week the company announced plans to offer $100 million in senior convertible notes in order to pay down its debt. This may have induced traders to send option volume to 19 times the normal level, with fresh volume in February 25 calls to lock in upside share movement over the next week. GMX is due to report earnings on February 26, having produced an earnings miss last time out. The company’s shares are down 18.9% for the year to date.
