PFE – It’s a dour day for drugmakers (note our comment on Schering-Plough and the industry ETF below), and with Pfizer lingering 1.4% lower at $21.38 – spackling on its 15% decline for the year to date and just a buck a change above the multi-year low of $20.27 – option traders have put twice as many puts in play as calls in anticipation of druggy doldrums extending into the second half of the year. Even now some analysts are backtalking management’s hesitance to pursue to a major acquisition in order to prop up growth. Today its share price even shrugged off a federal appeals court ruling upholding a patent infringement case against Teva Pharmaceuticals in favor of Pfizer.
Today’s volume also bears out the anticipation of further declines, with what looks like bear put spread activity in the June contract between strikes 17.50 and 22.50 – in this scenario, the trader would sell puts at the 17.50 strike for 20 cents to defray the cost of buying the 22.50 put, which costs about $2.00 today. Further evidence of a downview for Pfizer shares can be seen in the September contract, where more than 10,500 positions in September 17.50 puts were freshly entered for about 50 cents – this premium reflecting only about a 16% chance that Pfizer shares will skid that low heading into September.
HK – Last week, oil and natural gas producer Petrohawk Energy divulged quarterly earnings that far outclipped the market’s expectation – but it’s today that we’re seeing some belatedly bullish follow-through with a 6-fold increase in trading volume as its shares pare back 2.4% to $17.81. Today’s share price move sent call-side premiums sharply lower, but it doesn’t appear to have deterred option traders from putting themselves in the catbird seat for a break of the $19.11 52-week high. Instead, the comedown in call prices looks to have brought out the bargain-hunters in March 20 calls, which are being bought heavily for 20 cents apiece. Interest in the same strike extended into the April and June 20 contracts.
PVH – Calls traded at a three-month high in Philips Van Heusen, the retail brand holding company behind the Calvin Klein and Kenneth Cole apparel labels. With shares down .84% at $32.94, the prevalence of ratio call spreads in the June contract resulted in overall option activity some 39 times the level normally observed. It looks here like a trader bought into the June 35 calls for $3.10, almost covering the price entirely by selling twice as many calls at the 40 strike for $1.40. The call spread is a strategy that traders often resort to in periods when high implied volatility drives premiums – and thereby trade costs – sharply higher. By doubling up on calls sold at the higher-strike price, the trader prudently manages the cost of the higher-delta, lower-strike call, and is able to capture profit on the trade with a much lower upside move heading into June.
HUN – Today marked Day Two of the biggest onslaught in put buying that diversified industrial chemicals company Huntsman has seen since January, sending overall volume to nearly 6 times the norm. Shares in Huntsman are down .87% to $24.04. The urge to buy puts at the April 25 strike may be the culprit behind the elevated 33% implied volatility, which compares to a 27% historic reading. Huntsman is due to report earnings on April 29, a time horizon that coincides with the May contract, but today’s volume indicates an expectation of continued downside heading into an earnings-correlated move. It bears noting how truly well-upholstered the bearish put side in Huntsman appears, with its open interest of just under 37,000 option contracts representing 5 times as many open put positions as calls.
XLF – Financial Select Sector SPDR – Shares in the financial sector ETF are ticking in 1% lower at $24.02 this afternoon, reversing early lows. With more than 547,000 options trading, making it one of the most active option families on our platform today. What’s interesting to note here is the ever-widening spread been historic and implied volatility, where the 49% implied vol reading tells us that option premiums are pricing in 43% more price risk to the financial sector over the coming month than it has shown historically. With option prices so inflated, earlier today investors seized the opportunity to sell premium at the March 24 straddle, where the $2.00 price of the position would be pocketed by an individual looking for an abatement in this very hot implied volatility reading in the near term. It also appears that trader sought fresh positioning in April 25 calls, in anticipation of share price appreciation heading into April. The $1.23 price of this position reflects a slightly worse than 50/50 chance that the XLF will pull back above $25 by April expiration.
WM – Still reeling from yesterday’s S&P downgrade in its credit rating, shares in Washington Mutual are trading 13.5% lower at $10.18. Further evidence of the sense of trepidation and unease with which option traders view its current share price is apparent in its implied volatility reading, which at a vertiginous 135% suggests 61% more price risk to WaMu shares over the coming month. While the fact that 4 times as many puts are trading as calls would seem to imply a similarly defensive posture among option traders. Most of the action is playing out right now at the March 12.50 put line, where some 40% of the early morning volume was concentrated, much of it selling to the bid.
JPM – Meanwhile, shares in brokerage JP Morgan Chase are trading off their lows, still down .24% at $37.30 this afternoon. Implied volatility remains angrily elevated at 54.7%, indicating about 23% more price risk to its share over the next month than it has shown historically. It looks as though traders are taking advantage of this discrepant volatility outlook by selling the front-month 37.50/40 strangle, accepting the $2.05 premium in the anticipation that J.P. Morgan shares won’t crater below the $37.15 low, but will remain hemmed in a range with $40 at the upper level for the next two weeks.
SGP – Option activity in drug maker Schering-Plough spiked to more than 6 times the normal level after FDA members said that its drug Bridion, designed to reverse the effects of muscle-relaxing anesthesia, appeared to be safe. What would seem to be bullish news for Schering-Plough failed to patch through to its share price, which is currently about 2% lower at $19.64. Given this counterintuitive reaction – and given the fact that Schering-Plough’s 44% implied volatility reading actually gaps well below the historic reading – it looks like traders are positioning long front-month volatility via the March 17.50/20 strangle for a combined premium of 75 cents. The position becomes profitable for the buyer with a break above $20.75 or below $16.75. Elsewhere, we were surprised to see a a dramatic level of 22.50 calls sell to the bid in the May and August contracts, despite the fact that premiums have come off some 14% from yesterday’s levels.
XLV – A dive into protection-stance extended to the Health Care Select Sector, a consumer health-products and pharma-weighted ETF of which Schering-Plough is a minor component. Some 30% of the index fund’s weighting is devoted to Johnson & Johnson, Pfizer and Merck. With underlying shares down 1.2% to $31.73 over the noon hour – setting a fresh 52-week low – a spate of put-buying sent overall option volume to more than 9 times the normal level according to our market scanners. Of note here was buying on volume of 5,000 lots in the March and April 32 puts, along with 10,000 bought on the offer in the March 33 puts.
CIEN – An upside earnings surprise from Ciena Corp, which makes networking equipment, sent shares 10% higher to $27.50 and option volume to 3.5 times the normal level. With twice as many calls trading as puts, the market looked to offload puts at the 25 line despite these puts losing 87% of their value overnight, while calls at the 30 strike were bought handily in March and April, implying sustained upside price action for a stock that had depleted some 17.6% in value heading into today.
