Today’s tickers: S, DBD, VRSN, CFC, XLF, MER, C, SIRI, URBN, OVTI
S – Shares in Sprint led telecom sector losses with a 1.6% decline to $6.47 on the fairly paltry news catalyst of a poor WiMax technology rollout in Australia. Implied volatility in Sprint options has shown hair-trigger sensitivity – to wit, an analyst downgrade two weeks ago sent shares down 10% and implied volatility up past the 90% mark – and today’s implied volatility reading at 94.6% is even higher (up 21% from yesterday, in fact). Measure this up against the degree of fluctuation to which Sprint shares have already shown a capacity, and you have an option market that’s pricing in about 14% more price risk to Sprint shares over the next month than they have already shown historically…on no news catalyst? Today, as was the case earlier this month, we see option traders taking the opportunity of a down day for shares and an upward spike in implied volatility to buy front-month calls. Perhaps the sense is that barring any significant news catalyst, Sprint shares – having dwindled from a 52-week high of $23.34 – have digested all the bile the market could possibly fling at them. This time the buying interest is at the April 7.00 call line. More than half today’s active volume in Sprint options appears centered at this strike, where the buying volume is more than triple the prior open interest, and where traders are paying about 45 cents for the right to buy Sprint shares at $7.00 by April expiration.
DBD -From pregnant chads to put spreads…option activity in Diebold, the producer of ATM cash machines as well as those notorious automatic voting terminals, ticked our market scanners owing to an increase in trading volume to 30 times the normal level. This occurred against flat share price action at $37.00. Earlier this month, Diebold shares posted a 61% gain over the course of a single day after the company’s board uniformly rejected a $40-per-share takeover bid from United Technologies as “too low.” Shares have come off about 1.6% in the interim, but it looks like some option traders are banking on a drop below the $30 line by May – possibly on expectation that no new bid will be forthcoming. Today’s volume appears centered in 12,000-lot put spreads, with a trader buying the May 30 put for $1.00 and meeting the cost in part via the sale of puts at the 25 strike for 20 cents apiece. The trader in this case profits with Diebold shares trading in the $25.00-$29.20 range by May. .
VRSN– Options in Verisign Inc., the maker of Internet firewalls, security certificates and the like, are trading at 11 times the normal level today against a 1.4% decline in shares to $35.60. Implied volatility is currently at a 13% elevation to the historic reading, where it has remained for the past 2 weeks. This anticipation of added price risk to Verisign shares, as a component of option premiums, sends the price of options higher, which could explain why it appears that a trader took the opportunity to sell volatility at the June 35 straddle, accepting the $6.00 premium (nearly 17% of the current share price) in the confidence that Verisign shares won’t stray far beyond current levels into June. .
CFC – Earlier today we heard vague and unsubstantiated chatter this morning that Countrywide, the beleaguered mortgager that scooped up for a song by Bank of America back in January, could be on the receiving end of a sweeter takeover offer. Of course, this morning’s rumor – formless and shapeless though it is – may just boil down to conjecture about other theoretical corporate takeouts that might benefit from a helping hand from the Fed since their historic intercession in the Bear Stearns imbroglio a week ago. The idea may be that “some” market players – nevermind who – “might” be emboldened to make a bid for distressed if they had some assurance that the Fed had their back. Until last week, that sort of thing “just wasn’t done.” Still, there’s no word yet as to which major bank player, apart from current suitor Bank of America, might be in a position to present a more attractive offer for a company that has come to embody virtually every symptom of the housing market head-trip. The rumor’s impact on Countrywide’s share price was muted for much of the day, though shares did close 2% higher at $6.27. What was consistent throughout the day, however, was a spike in implied volatility in Countrywide options of more than 25% to 99.4%, making it one of the top volatility gainers on our platform today. What’s also noteworthy here is the exodus of traders into out-of-the-money calls at the $7.50 strike, which were bought on volume of more than 17,000 lots today – more than three-quarters of the level of prior open interest – for about 25 cents apiece. This premium reflects a better than 1-in-4 chance that Countrywide can breach the $7.50 mark by April’s expiration.
XLF – Today’s softer performance by the financial sector ETF smacked of a healthy easing after two sessions of gains for financial shares. With the price of the ETF down .71% at $26.47 heading into the close, put-buyers were out in force early today, with more than twice as many puts trading as calls on a combined volume of some 220,000 lots this afternoon. Early on we noted fairly clear-cut put buying in the April contract at strikes of 22 and 25, where a huge chunk of this morning’s volume was situated. Prices on both these positions were 20-25% higher today owing to the decline in share price, and while premiums are currently reflecting an almost 1-in-3 chance of XLF shares breaking below $25 over the next few weeks, the probability of a break below $22 is only about 9%. Buyers have taken their chances nonetheless.
MER – Earlier today, analysts at JPMorgan Chase slashed profit estimates for Merrill Lynch by 45% on concern that the investment bank may not escape further writedowns. Shares closed 1.1% lower at $47.85 as a result. While implied volatility in Merrill Lynch has come off sharply since last week’s revelation that it was suing XL Capital Assurance after the company attempted to cease insuring the kind of CDO contracts that could leave Merrill vulnerable to just these kinds of writedowns. Still, the 81% implied reading suggests the option market still sees a little more risk to Merrill Lynch shares over the next month than they have shown historically, and the fact that twice as many puts are trading as calls suggests a desire among traders to seek protection against possible declines. Put-buying at the close-to-the-money April 45 strike isn’t so mystifying in that regard, although the $4.00 price of the position today would require a 13% drop below currently levels just to break even. The hunger for puts extended even to April’s 35 strike line and below – with nearly 8,500 lots trading at the aforementioned strike for $1.85 apiece.
C – Citi shares bucked the prevailing trend among financial issues with a .47% gain to $23.38 this afternoon. Yesterday we observed collar trading in the September contract that may have been the work of a nervous shareholder looking to enhance the yield on a underlying position while protecting it from the kind of market turbulence that has sent Citi shares as low as $18.00 in recent weeks. A look at the implied volatility reading in Citigroup shares shows traders actually expecting about 3% less volatility out of Citi shares over the next month than they have shown historically, which may have represented so-called “perfect timing” (if such a thing exists) for a trader to go long the May 20/25 strangle for a combined price of $2.25. The position would generate profit for the trader with a break above $27.25 or below $17.75 – a near $10 range in the month of May. Evidence of selling at the May 15 put strike suggests that the 30-premium on this out-of-the-money strike may have been the funding mechanism for the long volatility position.
SIRI – Yesterday’s news out of the US Justice Department that would approve the $4.6 billion merger of Sirius and XM Satellite Radio Holdings, dispelling concerns of a monopoly on radio broadcasting, didn’t carry over into big gains for Sirius stock today. With shares down more than 2% at $3.08 (XM shares also closed lower), we nonetheless discovered an increase in trading volume to 3.6 times the normal level. Earlier today traders sought to slough off call positions at the $4.00 line in the April and June contracts, where open interest had built up heavily in the front month yesterday on back of the announcement. Traders here seem willing to accept paltry premiums of 5 cents for the April position and 15 cents for the June contract, in the expectation that no break past the $4.00 threshold – a break of the 52-week high – will be forthcoming in the next few months.
URBN – For the second time in three sessions, rangy hipster retailer Urban Outfitters featured on our “Hot by Option Volume” market scanner. Last Thursday we observed fresh volume at the September 35 call line that would seem to suppose a break to all-time highs on the heels of the back-to-school shopping season. Today its options are trading at 3.5 times the normal level as shares closed .77% higher at $32.76. Again we observe traders placing their marks at the 35 call line, this time in the June contract, where it appears that most of this morning’s volume has traded to the middle of the market at around $2.00. The trader in this case may be looking for a more expeditious break of the 52-week high we mentioned last week, taking advantage of a 13% comedown in call-premiums on back of today’s share price movement to do so. Current delta readings show option prices reflecting a 40% likelihood of Urban Outfitters breaking the $35.00 level by June, while the odds in September are somewhat higher at 47%.
OVTI – Shares in Omnivision, the maker of CMOS image-sensor semiconductors used in cameras and cell phones, closed 5% higher today at $19.63. Earlier today we saw its option volume more than triple, with a glut of activity in the June contract that appeared to be long-volatility positioning well in advance of its May 30 earnings report. The fact that implied volatility is ticking in 12% below the historic reading translates to lower option premiums all around, and traders may feel that Omnivision – a stock that’s up nearly 20% for the year to date, outperforming the Russell 2000 Technology Index by a whopping 28 percentage points – has plenty of room to move on back of its next earnings cycle. To that end it looks like traders are buying at-the-money June 20 calls for $1.50 apiece, as well as 17.50/22.50 June strangles for a combined premium of $2.20. The price of this position offers protection for the buyer with a break above $24.70 (within 50 cents of its 52-week high) or below $15.30.
