MS – With brokerage shares still humming along from the jump-start of this week’s Fed liquidity action, we were interested to see decidedly contrary share price action in Morgan Stanley. Morgan, which joins sector peers Lehman Brothers, Goldman Sachs and Bear Stearns in reporting earnings next week, closed 3.5% lower at $41.01 this afternoon. Its option implied volatility – a measure of the level currently shows an 11% higher risk premium to Morgan Stanley shares over the next 30 days than they have shown historically – a figure that is likely to climb in the leadup to next Wednesday’s report. Earlier this week the New York Times reported that the shareholder-activity CtW Investment Group, which represents some $1.4 trillion in pension funds, may lobby Morgan Stanley investors to vote down CEO John Mack – the man who has led Morgan Stanley through nearly $11 billion in writeoffs.
Speculation over the imminent leave-taking of a CEO has been a factor in option trading in financials for months now – witness the November out-of-the-money call buying we saw last fall as calls for the resignation of Citigroup CEO Chuck Prince began to grow. Call-buying in Merrill Lynch also picked up when conjecture about the departure of Stan O’Neal gathered strength. But while the heat is on John Mack, the heat is off Morgan Stanley calls, with twice as many puts are trading as calls in Morgan Stanley suggesting a largely bearish tinge to the action today. Even more interesting is the strike placement of this volume – it appears that a trader today looked to roll over a 7,000-lot position in March 35 puts into the same strike at the April contract for 75 cents. A long position at this strike is playing on a downside break to Morgan Stanley shares to 5-year lows.
EL – A whiff of ratio put spread activity in cosmetics giant Estee Lauder sent option volume to more than 18 times the normal level, suggesting limited summertime downside for the skin care brand despite the fact that its shares traded .42% higher at $45.16 today. With today’s volume heavily localized in the July contract, it looks like a trader sold 2 of the July 40 puts at $1.15 against the purchase of 1 put at the 45 strike for $2.95. This strategy allows the trader to limit the trade cost to a debit of just 65 cents, compared to the $2.95 cost of buying the higher-strike puts outright, and yielding a breakeven at a far higher price of $44.35 than could otherwise be achieved by buying the single put. Shorting the two puts means the trader is reasonably confident that shares won’t fall below the lower strike price into July. Estee Lauder shares have traded as low as $37.26 over the past 52 weeks. While its open interest shows 3 times as many call positions open as puts, today’s put spread activity matched up to more than half the total number of option positions in the entire company.
PGNX – It’s been a painful session for genetics-based drugmaker Progenics. Shares in the pharmaceutical company plummeted some 64% to $4.95 on news that its experimental colon drug failed to relieve stomach blockages in clinical trials compared with a placebo. The development sent option volume to 11 and a half times the normal level, with 4 times as many puts trading as calls. Interestingly, with a second Phase 3 trial of intravenous methylnaltrexone already planned, the FDA is set to render a decision in late April on the drug’s use for patients suffering from opioid-induced constipation due to serious or terminal illness, option traders are already positioning very pessimistically for that ruling. This was evidenced by heavy buying activity at the May 7.50 strike at $3.30 per contract – a position that implies 70 cents more downside heading into the month of May. Progenics shares have traded as high as $27.59 over the past 52 weeks.
CAT – Shares in Caterpillar, the iconic maker of steam-shovels and bulldozers, hammered 3.6% higher to $75.25 today after the company surprised with the market with a lift in its 2010 sales forecast. Caterpillar CEO Jim Owens said the company stood to profit handsomely from the construction expansion projects in the emerging markets as well as infrastructure upgrades in North America and Europe. The gain in share price elicited a 100% gain in call volume for Caterpillar this morning. What’s interesting to note here is the gradual upward spike in implied volatility over the month of March and how it remained unchanged after today’s positive news announcement. Since the start of the month, implied volatility in all Caterpillar options has gapped more than 30% higher, remaining steady at 34.5% today even after the amended sales forecast. This shows about a 14% risk premium to Caterpillar shares over the next month, and may explain the brisk trading in March 75 puts, as well as calls at the 75 and 80 strikes, that could suggest volatility trades on the rise today.
TMA – From extreme unction…to extreme liquidity? Thornburg Mortgage, the jumbo-adjustable-rate mortgage lender that tanked last week when it failed to meet a margin call, recovered 86% from yesterday’s levels to read $2.91 in afternoon trading. The move came after a Bear Stearns analyst surmised that yesterday’s move by the Fed to grease the hinges of the credit market by expanding its securities lending facility would greatly aid Thornburg’s chances of survival. The doubling in share price sparked a veritable trader’s market in March 2.50 calls, which went to buyers and sellers for around $1.25 apiece on volume nearly twice the open interest. The move to sell puts at the 2.50 strike suggests that, indeed, the darkest hour of “extreme unction” for troubled Thornburg may have passed, and that the share price may reasonably be expected to hold on to current levels for the duration of the March contract. Option premiums suggest a better-than-75% chance of that being the case.
UNH – Another bearish upshot for the managed care companies followed today’s announcement by the nation’s second-largest Medicare servicer, Humana, that it would lower its earnings guidance for the year due to rising prescription costs. While the impact on Humana’s share price and option activity was swift and sure (detailed below), we observed a higher uptick in implied volatility and option volume in the first-largest Medicare drug-plan servicer United Health. Option volume quickly surged to 5 and a half times the normal level in concert with a more than 10% spike in implied volatility to 49.5%. Traders today appear to be skipping long stones across the March 35 puts, with heavy buying interest at this strike in the March (trading at more than double the open interest), June and September contracts. UnitedHealth shares closed 4% lower at $36.68.
HUM –Investors punished Humana, meanwhile, with a 14% rout in its share price to $40.75, capsizing below yesterday’s lows. Options traded at more than 25 times the normal level, with buying interest at the March 35 put strike and one strike lower heading into April. Implied volatility topped out at 87% today, before pulling back sharply to 63% after Humana officials announced that the outlook adjustment may have been the result of an anomalous calculation.
CVH –Coventry, meanwhile, managed to pare early session-losses to close 1.8 % lower at $42.22. Today’s early, 7% decline in the stock struck us as evidence of the company taking a sympathy-hit on the current straits of fellow Medicare drug plan servicers UnitedHealth and Humana. Implied volatility at 44% actually suggests option premiums pricing in about 20% less risk to Coventry shares over the next 30 days than they have shown historically. We wonder if that disparity may be encouraging some long volatility positions at the April 40 straddle – a move anticipating an uptick in volatility heading into the April contract – as part of the generally high level of traffic in April 40 calls.
RIO – Companhia Vale do Rio Doce (CVRD) – Shares in Brazilian big-three miner CVRD surged 2.2% to close at $34.30, and while the volume ratio of puts to calls shows 3.5 puts trading for every call, much of this action appears tied up in short ratio put spreads, implying continued upside for the share price. It looks like this strategy was deployed in the June contract at strikes 27.50 and 32.50, where it looks like traders bought 2 of the lower strike put at 90 cents per contract against the sale of the 32.50 strike for $2.51. The limited-risk strategy rewards the trader with an initial credit of 71 cents per contract in the expectation that both strikes will expire worthless in June. Today’s share price represents about a 9% discount from the 52-week high.
MSFT –Shares in the software giant notched 2 % lower to $28.64 today, and with more than 123,000 options in play by afternoon trading, Microsoft was one of the most active tickers on our platform. Heavy traffic in March calls at strikes of 27.50, 29 and 30 trading to buyers and sellers has helped send call volume to 2 and a half times that of puts. But we also noted earlier today what appeared to be long put spread activity in the April contract, with an investor selling puts at the 26 strike for 20 cents to defray the purchase of 27.50 puts for 44 cents apiece in a play on an April pullback in its share price. With shares sitting just below the $30 shelf as of this writing, the delta on the March 30 call shows a 1-in-3 probability of Microsoft shares closing above $30 by March 20, while the probability for April is slightly less than 50/50.
COF – Today’s 260% increase in call volume in Capital One is a strong indication that option traders are confident in the near-term staying power of a 2% gain in share price to $47.67. Much of this mood was conveyed through heavy buying at the March 50 call strike, which attracted long positions at about $2.15 per contract, implying another 4% upside yet to come over the next 8 days before the contract generates profit for today’s buyer. It must be said that the posture among Capital One option traders has long been cowering – open interest shows 1.6 puts open for every call, a proportion that has remained more or less unchanged since late-January.
