Today’s tickers: SKS, HANS, HNT, XLF, C, GS, BSC, PDLI, MOT, AW, KFT
SKS – Another day and no news of a deal for department store Saks by Iceland’s enterprising Baugur Group. The Wall Street Journal today reported that Saks is one of three potential takeover targets being mulled by Baugur at present – the other two being U.K.-based Moss Bros. and Debenham’s. Saks shares closed .17% lower at $17.17 on Friday, and the surge in late-day option trading shows option traders digging in for the long haul by trading March puts at 17.50 and 20 – possibly a bear put spread strategy that would limit potential profits but help to defray the $3.60 premium on the $20 put that comes as a result of Saks’ extremely elevated 77% implied volatility reading. For a second consecutive session we observed volume at the May 22.50 straddle, which at $6.73 is roughly unchanged in price from yesterday.
HANS – Hansen Natural Beverages, the maker of Rumba energy drinks, and a line of eponymous fruit juices, drew a Goldman Sachs analyst upgrade earlier today, on expectation that sales at its Monster drink unit could surge as much as 54%. Earlier this month its shares rallied on resurgent analyst talk, this time out of UBS, that Coca-Cola might take advantage of its 10% year-to-date share price decline to stage a takeover and leverage immediate manufacturing synergies. So there’s a fairly broad palette of expectations heading into Hansen Natural’s earnings report on February 25, all of which has contributed to a surge in option volume equivalent to 25% of its total open interest, and almost all of it – quizzically – in puts. The put-buying we observed this afternoon – this as shares traded 6.7 % higher at $40.48 no less – occurred at the March 40 strike, at premiums of $3.80. This position implies a 9% pull back from current share price levels that would all but dispel an earnings surprise or any bold move on the part of Coke. Implied volatility has remained at an elevated 74% reading for much of the past month, ever since the Coke-for-Hansen reports resurfaced, as traders look for shares in Hansen to show a third more volatility over the next month than they have shown historically.
HNT – Capping off a week that has seen an inordinate amount of volatility in health care insurers, shares in managed care provider HealthNet rebounded 5% higher to $47.84. It appears that a trader took advantage of the bounce back in share price to go short a March put spread at the 47.50 and 50 strikes. In this case the trader would have bought the March 47.50 puts for $2.10 against the sale of 50 puts for $3.47, resulting in a credit spread that breaks even for the buyer if HealthNet shares gain another buck and change $48.63. The maximum profit for the trader is limited to the $1.37 net credit yielded when the trade was initiated – in this case, the buyer is hoping HealthNet shares will trade even higher than $50 so that neither put is exercised.
C – Unsettling news out of the financial space emerged this morning in the form of reports that Citigroup has halted redemptions from one of its hedge funds, CSO Partners, a fund reportedly specializing in corporate debt. A $100 million cash infusion from Citigroup last month wasn’t enough to deter investors from trying to withdraw more than $150 million of the fund’s $500 million in assets. The Wall Street Journal also reported that another fund in Citigroup’s Alternative Investments division, Falcon Plus Strategies, lost 52% of its value in Q4. On the option front, some 186,000 contracts traded this afternoon. Earlier today, it appears that a trader took off some exposure from a bullish position in the January ’09 35 calls. Nearer-month action shows heavy put-buying interest at strikes 22.50, 25, and 27.50, while the inclination is to sell calls at strikes of 27.50 and 30. Shares closed 1% lower at $25.46.
BSC – Bucking the defensive trend throughout the bank-and-brokerage space, shares in Bear Stearns are 5.7% higher at $83.00, urged on by unsubstantiated “expiration day” rumors that the most beset of the major brokerages would be on the receiving end of a $98 cash takeover offer over the weekend. Though we’ll not speak to the veracity of such rumors here, it should be noted that the 134,000 options in play this morning are trading 1.5 times as often to calls, with heavy buying interest in March 80, 85, 90, and 95 calls. The rumors also bid up the price of the February 80 calls, which at $2.85 are 850% more expensive than yesterday. Volume in the 85 calls, meanwhile, traded at just 30 cents. While we might have expected the takeover bluster to elicit a wave of profit taking for existing call-holders – especially those lucky souls holding the 85 strike – volume at both strikes traded principally to buyers.
GS – Goldman Sachs – Analyst reports this morning suggested that the country’s biggest securities firm by market value could report as much as a $1.7 billion writedown on exposure to leveraged loans on tied to commercial mortgages. Shares held steady, pulling off a 1% gain to $178.40, but the news earlier today elicited fresh volume in February 175 calls, which are about to expire, and which attracted sellers given the 25% discount on the position to $2.00. Some of this volume may be involved in straddle plays with the 175 puts.
XLF – Given the largely bearish twinge to today’s news flow, it seems downright admirable to see the Financial Select Sector SPDR gained 1.3% to $26.76. As much as we were flummoxed by the ambivalent directionality in the fund’s options – heavy selling in March 27 calls and buying in 26 puts implies near-term defensiveness despite the higher share price action – we were intrigued by the huge volumes going through in the June contract. It looks as though a guardedly bullish trader with an underlying long position in the XLF may have put on a collar this morning, selling the June 32 call for 48 cents and buying a protective put at the June 21 strike for 66 cents. This position occurred on volume of 20,000 lots at each strike, and may have been complemented by 10,000-lot put spreads at the June 23/24 and 27/28 combinations.
PDLI – Shares in PDL Biopharma, the developer of the well-known breast cancer drug Herceptin, advanced 7.5% to $15.63 this afternoon on the eve of its earnings release. Anticipation ahead of earnings goes some way in explaining its elevated 54% implied volatility reading – showing about 16% more price risk to PDL Biopharma shares over the next month than they have shown historically. More intriguing still is the concentration of volume in May 17.50 calls, in which a nearly 20,000-lot new position was entered for 52 cents this morning. A buyer of this position does so anticipating a break of $18 – a 22% gain from current levels that would more than erase its loss for the year to date. In October, PDL confirmed that it was actively seeking a buyer for some key assets, or even a wholesale takeover. Since then it has successfully divested its cardiovascular products division to EKR Therapeutics, is still “desperately seeking” buyers for its royalty stream, biotech research and development, and manufacturing assets. Today’s bullish positioning and the specificity of the time frame suggest that another deal might be in the works.
MOT – Shares are down 2% to $11.29 at after senior executives at Motorola competitors, Samsung, LG and Sony Ericsson, quickly nixed talk that one of them might be willing to buy Motorola’s handset unit. Today, industry pundits, among them InformationWeek, are bewailing the fact that the Motorola used its booth at this week’s Mobile World Congress event to debut three rehashed phone models to be marketed in emerging markets. Yesterday we noticed what appeared to be strangle selling that we believed was tied to a lack of confidence in Motorola being able to successfully offload its handset division. Today, with shares down, it looks like some traders are taking the opposite tack and positioning for resolute upside in Motorola, buying out-of-the-money calls at the 14 strike. The 7-cent premium reflects barely a 6% chance of Motorola making a break past $14 over the next month, but that didn’t deter traders from piling freshly into the call-side position on a volume of more than 11,000 lots.
AW – Allied Waste Industries Inc. – Shares in the country’s 3rd biggest garbage hauler surged 4.8% to $10.37 after the company reported an 11-fold increase in Q4 profits after a change in focus from residential to commercial waste haulage allowed it to charge higher rates. The 22,000 active option contracts represented 13 times the normal level of trading activity we tend to see in allied waste, with 3.6 times as many calls trading as puts. The value of the February 10 call doubled in value on the news, attracting volume despite its imminent expiration. March volume shows a cluster around the $10 straddle, where we may be seeing long volatility positions going through at 95-cents apiece, predicting continued upside past $10.95 or a retracement to $9.05 that would imply another test of the 52-week low. Implied volatility at 32% continues to show some elevation against the 29% historic reading, suggesting that added risk hasn’t dissipated from Allied Waste’s shares as option traders anticipate movements over the next month.
KFT –Kraft Foods – Kraft shares have shaken off much of the malaise that has characterized the food sector in recent sessions amid spiraling grain and commodity prices. Today’s 6.8% gain to $31.33 follows this morning’s report of an SEC filing disclosing an 8.6% stake in the company by Warren Buffett’s Berkshire Hathaway. The news sent option volume to 2.7 times the normal level, characterized by heavy buying in March 32.50 calls for 30 cents apiece, and buying interest in June calls at strikes 30, 32.50 and 35.
