Today’s tickers: TGT, ALTR, ANF, TSRA, LM, MER, LEH, APOL
TGT– We’re positively intrigued by a late-afternoon spike in Target’s implied volatility – a 12.5% gain that seemed to come out of left field from the quirky retailer, and which now indicates option traders pricing in more than a third additional price risk to Target shares over the next month than they have shown historically. With no news in the public domain, and the company still a month away from its May 23 earnings report, this is a scintillating development indeed. Even more so is the fact that with shares down 1.8% to $50.06 – possibly on fallout from bearish comments from J.C. Penney – option traders are positioning with unmitigated bullishness in the May contract, buying up calls at the 50 and 55 strikes on volume exceeding open interest, while selling puts at the 45 and 52.50 strikes. The price of Target’s May 55 call at $1.30 reflects barely a 30% probability of landing in the money, but fully 10% of today’s active volume in Target is planted at precisely this strike, trading to buyers to boot. Open interest shows a fairly even split between puts and calls, giving today’s positioning in an elevated implied volatility environment added luster. Speculation over Target in recent weeks has centered on the fate of its credit card business, a division that activist investor William Ackman is keen to see divested. Two weeks ago, Target acknowledged that it was in talks with J.P. Morgan Chase over the sale of a 50% interest in its credit-card receivables.
ALTR– Shares in Altera, the maker of so-called programmable logic chip devices, are trading .82% lower today at $18.17, extending a slump that began in late-October when the company slashed its sales forecast. What interested us most today however was an intraday quintupling in option trading volume that did not appear to follow any news announcement, wrapped up in fresh writing of out-of-the-money May calls at the 17.50 strike for $1.65. The volume here would seem to suggest a fresh leg lower for Altera shares heading into the month of May that would put shares well below the 52-week low of $16.17. Trading in this highly risky proposition supposes a pretty solid level of confidence that shares won’t recoup the 17.50 mark that would make these calls vulnerable to exercise. Implied volatility, a measure of the extent to which option traders feel a stock’s price is vulnerable to future fluctuation, has shown a 21% elevation above the historic reading for the past week.
LEH– Bullied brokerage Lehman Brothers has been in the unenviable position of having to fend off malignant rumors of its capital adequacy in recent weeks – most recently yesterday, when a spate of large-volume put buying and a sudden spike in the price of its credit default protection stoked still-smoldering rumors of a Lehman meltdown. Today, its shares are down just .83% to $38.40, after the company spoke out to dispel liquidity rumors, and Citigroup upgraded the brokerage’s shares on claims that market fears were overdone. The recent travails of its share price have clearly had an inflationary effect on premiums, presenting rich opportunities to sell volatility for traders with the iron constitution to venture down that route. It appears that one trader today may have picked just such an opportunity in the January ’09 contract, by selling a 1,000-lot position at the $40 straddle, which carried with it a massive $21.40 premium – higher than Lehman’s share price during the cataclysmic volatility of a couple weeks back. Having said that, the prevailing mood among option traders is one of cautious sobriety – twice as many put positions are open as calls, and puts are outtrading calls today by a factor of 2.5.
MER – Analyst rumblings this week of a possible $6 billion writedown for Merrill Lynch has fueled a sense of unease about the ramifications for its share price. This is apparent from the disparity between its historic volatility reading, which at 81% shows the degree of turbulence that its shares have already weathered, and the implied volatility reading, which is nearly 25% higher, reflecting the dangers that may lie ahead. With nearly 134,000 option contracts active by early afternoon, Merrill Lynch is one of the most actively traded option families on our platform, and the fact that more than twice as many puts are trading as calls attests to the largely defensive stance among traders. The kind of trading interest in out-of-the-money puts we’ve observed in other brokerages lately – to wit, the recent, notorious action in Lehman Brothers – has extended to Merrill Lynch today, but it’s worth mentioning that any bloodletting in its share price has been relatively limited today at 2.8%, keeping shares above the $40 line at $40.69. While April puts at the 40 line were mostly bought for $3.90 today, this expression of defensive trader behavior may have been funded by the sale of puts at the 35 strike, which implies a least a limit to any catastrophic downside. Puts at the out-of-the-money 30 strike were mostly bought for $1.75, which may be a speculative bet on a big slump for shares…or part of a collar strategy with the 50 calls to protect an underlying share position. Action in the May puts showed buying interest at the out-of-the-money 30 and 35 strikes, while the 25’s may have been sold to partially fund exposures elsewhere.
ANF– Shares in nubile clothier Abercrombie & Fitch dropped 5% to $72.63, far outpacing declines in its competitors J. Crew and American Eagle Outfitters. Implied volatility in Abercrombie & Fitch options has been climbing steadily over the past week, since news of a share sale by its senior VP followed disappointing same-store sales numbers for February. Following on from bearish developments such as these, shares in Abercrombie & Fitch are down 9% for the year to date, narrowly underperforming the S&P consumer discretionary index. With the implied volatility reading now showing a 16% elevation above the historic reading, it stands to reason that its option premiums are now higher than they were a week ago. We believe this may have induced traders to sell volatility in the January ’09 contract in the form of strangles at the 50/100 strikes and 60/110 strikes. This strategy would yield premium in the form of a $5.30 payout for the former combination, and a $6.50 payout for the latter, predicated on an expectation of Abercrombie and Fitch shares remaining within a $50 range into January ’09. This hardly seems an audacious prediction, given that over the past 52 weeks, its shares have barely traversed a $20 range.
APOL– An earnings miss from Apollo Group this morning sent shares in the for-profit education company down 26% to a new 52-week low of $41.56. Apollo’s report struggled under the weight of higher marketing overhead costs, and a $280 million payout to shareholders after it was found guilty of fraudulently representing its recruitment policies. With the equivalent of more than a quarter of its open interest actively deployed in the option market today, Apollo is one of the most active tickers on our platform today – and the fact that implied volatility remains 23% elevated above the 61% historic volatility reading is a strong indication that the share-price drama still has time to play out. While it looks like April 50 puts drew sellers enticed by the opportunity to cash in on a 318% increase in premium to $9.00, lower-strike puts at strikes of 40 and 45 are trading heavily as well, and on higher implied volatilities – suggesting that the demand among option traders for exposure is heavier at these lower strikes. Elsewhere, it looks like a trader struck a bet on Apollo Group’s volatility persisting into May by buying the 40/50 strangle – note here, at $4.50, the price of the long strangle with its ampler time value is still half the price of that front-month $50 put. This position covers the buyer in the event of a recovery to $54.50 or a drop below $35.50.
TSRA– What a banner week it’s been for chipmaker patent infringement cases! With much of the hoopla following the Rambus-Hynix ruling having subsided, today it was Tessera Technologies’ turn to shine. Shares rose 30% to $21.55 after U.S. trade officials struck down a previous ruling, thus allowing Tessera’s patent-infringement charges against chipmakers including Motorola and Qualcomm to proceed. Tessera is seeking to block imports for chips that it claims violate two packaging patents it owns. Tessera shares lost half their value after a February ruling tabled its initial complaint. Implied volatility in Tessera options came off by more than a third as option traders put the equivalent of every fifth Tessera contract in play. The April 25 call appears to be the most popular battleground, with traders taking both sides of the call-side bet on volume nearly triple the open interest as the value of the position has risen 242% overnight. June calls at the 25 strike, meanwhile, traded to the middle of the market for about $3.40.
LM – Legg Mason’s announcement this morning that it is seeking means to restore liquidity to investors stuck holding the bag on $672 million of its so-called its auction-rate preferred securities. In a statement today, Legg Mason attributed the dearth of buyers for these auctionable securities to general disarray in the credit markets rather than any specific credit inherent to its own funds or portfolios. While the 2% decline in Legg Mason’s share price to $54.80 seems downright judicious given the massive dislocations of the market in recent weeks, implied volatility in Legg Mason options did rise by 10% to reflect a higher anticipated risk to its share price. Its options are trading at nearly 3.5 times the normal level, with traders seeking protection from possible share price declines in April puts, particularly at the out-of-the-money 50 strike. A drop below $50 – which is currently priced to reflect just a 22% probability – would put Legg Mason shares below their 52-week low of $51.51.
