Today’s tickers: RYL, XHB, QQQQ, RIMM, CROX, MU, ING, KLAC
RYL– This morning’s testimony by Fed Chairman Ben Bernanke, speaking before a congressional joint committee, brought surprising, if tacit, validation that the U.S. economy is indeed staring a dramatic slowdown full in the face over the first half of this year – this amid continuing shrinkage in homebuilding, consumer spending and employment. While the admission – which did all but call a spade a spade before a litany of recessionary cues for the U.S. – led to some profit-taking in U.S. stocks on back of yesterday’s orgiastic gains, it barely crimped the bullish tone to homebuilding stocks. Indeed, it would seem that where Bernanke’s testimony today represented the “cue” to an era of U.S. recession – traders in the homebuilding complex saw a “coda.” For that we turn to options of Ryland Group, the U.S. homebuilder with a pronounced presence in the Southeast and Texas (the Lone Star state, which in January of this year ranked third in the nation in terms of subprime foreclosures, represents fully a quarter of Ryland’s revenues.) With shares up 3.25% to $36.55 this morning, Ryland calls are trading at their heaviest volume since October 31, 2007, with heavy buying at the April 32.50 strike for $4.20 apiece indicative of a confident expectation of continued upside. The trader may have funded this purchase via the sale of out-of-the-money calls in the October contract at the 42.50 strike. Interestingly, the proportion of puts to calls in Ryland – which now stands at 2-to-1 in favor of the puts – made that shift to the defensive in early November, just after its last big gulp of call volume.
XHB– Today’s rally among homebuilders extended to shares of the SPDR S&P Homebuilders ETF, of which Ryland is a component. With shares up more than 3% to $24.20, the 32,000-plus options on the ETF actively deployed by traders made one of the most active tickers on our platform in early market action. Here we observed notable action in the June contract, where it appears that a cautiously bullish trader entered a 6,750-lot collar at the 20 and 28 strikes. The lower strike represents a protective put position against an undue jag lower for homebuilders, while the higher strike call is the price at which the trader would willingly part with a long position in the underlying share. Given that this trade was initiated at a net debit of 32 cents, the maximum profit totals $3.48 – that’s the amount of the sold call minus the current share price, with the net debit deducted from the outset. Calls at the June 24 strike were also bought heavily at around $2.40 today.
QQQQ– While shares in the Nasdaq-correlated QQQ’s eked out a .55% gain to $45.84, option traders conveyed a strongly bullish signal this morning on the springtime prospects of the tech sector via heavy call buying at the May 47 strike. The $1 premium on this call position implies a return to the $48 level in the ETF – a level not breached since early January. What’s more, the buying volume at strike amounted to almost 6 times the level of open interest, a reliable indicator that the desire to seek upside exposure to the Nasdaq index today is fresh. Delta on this call shows a slightly less than 50/50 likelihood of the call landing profitably next month.
RIMM– A 2% gain for the Blackberry maker just hours ahead of its earnings has shares trading just below the $120 mark. Meanwhile, with its implied volatility showing a 13% elevation above the historic reading, it appears that traders are seeking out the long side of the volatility equation in early trading at the 120 straddle. While the price of the at-the-money straddle has remained fairly constant at $16 so far this week, on Monday we noted what appeared to be buying interest at the 110/115 strangle in RIMM, which from a lower cost outlay of $13.15 has since appreciated to $14.80 as shares have scaled a $7 wall. Call-buyers are also being drawn to the 125 strike, while higher-strike calls are trading with comparable zeal to buyers and sellers.
CROX– Shares in the ventilated shoe maker dropped 8%, setting a new 52-week low at $15.95 after an analyst downgrade forecast shrinking demand for the colorful comfort shoe in a difficult U.S. economic environment. Perhaps mindful of the fact that more than half Crocs’ sales come from overseas markets, where consumers may not yet have had their fill of the fad footwear, we saw a striking contrarian play in the June contract. It appears here that a trader bought heavily into June 22.50 calls for $1.10 – the price off some 16% from yesterday’s levels – in anticipation of a near-$8 recovery in its share price heading into June. Crocs earnings are due out on May 2.
MU– Hours ahead of the release of Micron’s quarterly earnings report, its shares have staged a stunning 8% reversal higher after Nanya Technology (Micron’s co-adversary in last week’s losing patent infringement battle against Rambus) announced plans to spin-off a DRAM chip production plant in a 50-50 joint venture with Micron. While Micron will provide the technology, its cost contribution is still unresolved but is appears to be less than the Nanya’s commitment for equipment funding. With implied volatility at nearly 91% showing about 46% more price risk than Micron shares have already exhibited, the news sparked heavy buying in April 6.0 calls and May 7.0 calls – the latter trading at triple the open interest for about 45 cents apiece.
ING– Options on the American depositary receipts of Dutch financial services giant ING showed a 10% spike in implied volatility this morning after CEO Michel Tilmant indicated that the company may be looking for acquisitions on the Latin American market. Shares are 1.2% higher at present dispatch to read $39.84, but an increase in option trading volume to 9 times the normal level showed traders bracing for a decline in share price consistent with a company on the buying end of a corporate transaction. Puts at the May 35 strike traded freshly for 90 cents, implying a drop of nearly $6 in ING’s share price by mid-May. .
KLAC– Alas, to be tossed about like a feather on the waves of the analyst ratings game. Barely two weeks ago, shares in KLA-Tencor set a new 52-week low after a major downgrade followed analyst scrutiny of its reticle inspection business (used in the testing of silicon wagers), where it appeared to have been outpriced by Applied Materials as a major supplier to Intel. Last week, the company was on the receiving end of an analyst upgrade on a generally more optimistic view of the semiconductor space. Today KLA-Tencor finds its shares 1.7% higher at $39.56 but still down some 18% for the year to date. It looks like topsy-turviness of the market outlook may have generated losses for traders who bought April 37.50 puts for $1.65 back on March 12, the day of the initial downgrade. Those positions appear to have been closed out today for 47 cents – their value eroded by a 4% recovery for KLA-Tencor shares in the interim. But the implications of its price tussle with Applied Materials hasn’t left the minds of option traders, as evidenced by a fresh wave of put-buying at the May 40 strike for $2.52, possibly defensive positioning in advance of its April 25 earnings report. These buyer of the May puts today is looking for another $2 downside from current share price levels just to break even on the trade.
