Today’s tickers: XLF, AIG, ALB, THRX, SGP, CPHD, IGT, PDE
XLF – Sweet charity emanating from Warren Buffett’s offer today to reinsure $800 million in municipal bond portfolios provided a sense of alleviation to Dow and S&P components. VIX volatility pulled sharply lower, and the Financial Sector SPDR ETF, the de facto temperature-taker of the trouble-making financial sector, pushed 1.6% higher to $26.95. Option action paints a somewhat different picture, one of traders all-too-knowing that the sector is cruising on a temporary mood of goodwill, and mindful of its capacity to crater – witness what happened yesterday with XLF component AIG, whose credit outlook today was cut from stable to negative by Standard & Poor’s due to its exposure to mortgage-backed securities. The 254,000 options trading actively as of the noon hour are trading twice as often to puts as to calls, with heavy buying in at the 27 put strike in February as well as March. Front-month action also showed willingness to buy puts at strikes as low as 26, with the market ascribing a slightly less than 1-in-4 chance at a break below 26 before Friday.
AIG – American International Group – Yesterday’s spectacular meltdown in AIG on credit exposure woes has met with a 3% recovery bounce to $46.55 today, despite the aforementioned S&P downgrade. Highlights from the 147,000 options trading on our platform this morning include heavy selling interest in February 45 puts – a buyer of this position last week, when concerns about AIG’s credit exposure first began to elicit heavy put-volumes in AIG, would have paid 45 cents for the contract. Today’s going price is $1.15 – a more than 150% profit on the initial position. Elsewhere it looks like traders are seeking to sell volatility in the March contract at call strikes of 40, 45, 50 and 55 and at puts from 35 and up. Implied volatility still shows traders pricing in about 20% more price risk for AIG shares over the next month than is evident in the 52% historic volatility reading.
ALB – Shares in specialty chemicals maker Albemarle are up 6% today at $40.10 on a resurgence of takeover chatter suggesting German chemicals giant BASF is on the verge of a $4 billion-plus bid for the company. Albemarle has a strongly heterogenous product palette, producing polymer additives for flame-retardant and antioxidant use, catalysts for the oil refining industry, pharmaceuticals and other complex chemicals for industrial use. Although the takeover chatter remains unsubstantiated, some analysts have given credence to BASF as a possible suitor on strength of Albemarle’s oil refining catalyst activities, which are said to account for half of its profits. This is the second session in 7 that Albemarle call volume has picked up on BASF chatter, and today’s heavy buying interest in February 40 calls has driven overall volume to more than 4 and a half times the normal level. It also appears to have driven implied volatility higher by more than 20% to 50.7%. We would add however that there’s not a lot of momentum elsewhere in the Albemarle calendar – trading interest is firmly rooted in the front-month, at-the-money.
THRX – Shares in Theravance, the developer of small-molecule medicines, continue to loiter within a dollar of the 52-week low, despite trading at a 4.6% premium from yesterday’s close at $18.41. It’s interesting to note that open interest shows twice as many open call positions as puts in Theravance – a strong vote of confidence for a share that has lost nearly half its value over the past 52 weeks. This decline has been due in large part to uncertainty over the outcome of an FDA panel hearing on its lead antibiotic drug Telavancin. The 95% implied volatility reading in Theravance options attests to the level of foreboding among option traders ahead of the February 27 FDA panel hearing on Televancin, as well as Theravance’s imminent quarterly earnings report on Thursday. This elevated event risk has sent option volume to 38 times the normal level, with fresh buying in March 17.50 calls at $2.44 – showing a level of confidence as to its earnings and regulatory prospects that would seem downright affirming, were it not for the fresh positioning in June 15 puts that would suggest some traders positioning for a 22% break below the current 52-week low this summer. It’s a piebald view for the company’s prospects that makes us wonder what’s in the offing for Theravance in June.
SGP – Shares in drugmaker Schering-Plough are riding 5.7% higher at $21.79 after the maker of controversial cholesterol drugs Vytorin and Zetia reported a more than $3 billion loss for Q4, due largely to one-off accounting charges extending from its takeover of Organon Biosciences. Speaking with analysts in a post-earnings conference call, Schering-Plough’s CEO reiterated that the company continued to stand by Vytorin and Zetia, and the integrity of studies into their effectiveness. With more than 45,800 options trading, it looks as though option traders may have taken the opportunity to make closing purchases of puts at the 22.50 line in February and March. Puts at this strike may have been sold short on January 17 and closed today to book profit margins of 30-35%, taking advantage of sharply lower put-side premiums following the earnings report. Overall open interest continues to evince a high level of investor confidence in the company’s strategy, Vytorin and Zetia woes notwithstanding, with calls outweighing puts by a factor of 1.7.
CPHD – Shares in Cepheid, which develops molecular pathogenic tests for the clinical, industrial and biothreat markets, are trading .73% higher at $30.47 this morning. The company is widely expected to report its first-ever annual profit when it reports on February 28, and we wonder if that’s the catalyst behind option traders putting nearly 1 of every 3 Cepheid contracts in play this morning – 6 times the normal level of activity we see in this ticker and the highest level of call volume in at least a year. Traders are seeking fresh exposure to share price upside in the March contract at the 30 and 35 strikes. Implied volatility at more than 68% shows current premiums reflecting 12% more price risk to Cepheid shares over the next month than they have shown historically.
IGT –Shares in the world’s biggest slot-machine producer, International Game Resources, have tacked on another 2% gain to $47.24, following yesterday’s massive upside on speculation of a new contract to provide slot machines for Harrah’s casinos. Options in IGT are moving at twice the average volume as it looks like a trader took advantage of the bullish news flow to close out a call-spread position in the January ’09 contract. If our hunch is correct, the trader would have opened the position, buying the 45 calls and selling the 50’s for a net debit of $1.59 back on January 15, and closed the position this morning for a net credit of $2.70, resulting in a profit margin of nearly 70% on the original transaction.
PDE – Pride International – Shares in the Houston-based drilling contractor are up .96% this morning to $32.70. Pride shares are down nearly 4% for the year-to-date, and the company has underperformed the S&P 400 energy index consistently for the past 4 months. Still, it looks like at least one trader is banking on Pride making a break of its 52-week high in the month of July, given the heavy volume we observed in July 40 calls, which traded for 83 cents apiece. A look at open interest shows 4 times as many call positions as puts.
