Today’s tickers: F, BKC, NKTR, YHOO, C, CHS, BSC, BBBY
F – Shares in automaker Ford are down 1% at $6.84 this morning, one day after Standard & Poor’s warned that restructuring plans underway at all major car makers could be seriously jeopardized by soft U.S. sales and hard-to-come-by credit. S&P also warned that the automakers would face additional adversity if asset-backed securities markets continue to struggle. S&P’s ominous warning was released on the same day that Ford reported a 47% gain in Q1 sales in China, creating an interesting ambivalence in its outlook that would be enticing to a volatility trader. Implied volatility on Ford options at 54.8% actually rests below the 56.1% historic reading, a relationship that should keep option premiums lower in price, making long volatility trades more economical. To that end, it looks like a trader paid 29 cents to position long the May 6/8 strangle, a position that generates profit for the buyer with a break to the upside past $8.29 or below $4.71.
BKC– Yesterday we noted a wave of defensive positioning in forlorn fast-food chain Wendy’s in the form of a September collar trade that might have been deployed to protect a vulnerable position in the underlying stock. It was with this in mind that we observed a bump in option trading volume to more than 59 times the normal level in the world’s number-two burger chain, arch-rival Burger King, the highest level of volume in at least at year. Shares are 1% lower at $27.00 at present dispatch. Earlier today the company debuted the latest addition to its budget breakfast menu, the so-called cheesy bacon wrapper. The unveiling is in keeping with a Wall Street Journal interview with the company’s CEO, John Chidsey this week, who said that Burger King had deliberately resolved not to go head-to-head against McDonald’s or Dunkin’ Donuts on the discount coffee market – a strategy that would have required its franchisees to make costly investments in new equipment – preferring instead to put product and advertising spending behind the breakfast segment. Hence the cheesy bacon wrapper. Confident that its concentration on the breakfast crowd – and effective management of its turnaround by CEO Chidsey – will keep Burger King shares on an even keel, it looks like a trader today opened to sell the May 25/30 strangle, taking the 80-cent combined premium on confidence that shares will remain in the $5 range of the two strike prices heading into May. Burger King’s shares 52-week high is $29.09.
NKTR -Shares of small-cap pharma stock Nektar Therapeutics, dived on before-the-bell reports that an inhaled insulin product (Exubera), that it developed for Pfizer, may increase the risk of lung cancer. The company’s CEO announced that all negotiations with potential partners on the drug had been halted as a result of the data. Shares tanked more than 28% on the news, and implied volatility on its options rose nearly 74% to 90.6% – more than any other ticker on our market scan this morning. Interestingly, in cataclysmic-type share price declines like this, option traders sometimes resort to speculative call selling to take in premium rather than shell out the premium required to pay for a put position. When we noted that calls in Nektar Therapeutics were outstripping puts by more than 11 to 1, we suspected this might be the case. A check of time and sales revealed, however, that option traders were buying $5-strike calls in the April and August contracts on volume far exceeding the open interest, availing themselves of declines in the price of these positions of as much as 80% in anticipation of some near-term stabilization in Nektar’s share price. Heading into today, option traders had held more than three times as many call positions as puts in the company.
YHOO– Shares in prodigal takeover target Yahoo! are a smidgeon lower this morning, down .18% at $27.65, but that hasn’t stunted the news flow. Earlier today, a portfolio manager at Legg Mason, Yahoo’s largest shareholder, took Microsoft to task for leaking information at the weekend that it might lower its offer for Yahoo to reflect deteriorating market conditions. Speaking with the Wall Street Journal, the Legg Mason portfolio manager said, “Telling shareholders you’re going to take something away from them is not a way to get their support,” and said that even upping the original bid by as little as $1 would have been a key psychological gesture in avoiding a contentious proxy campaign to force through a takeover. The impending drama continues to leave a mark in the implied volatility reading of Yahoo options, which at nearly 48% shows traders looking for one-third additional risk to Yahoo shares over the next month than they have shown historically. Fresh volume appeared in the October contract, where it looks like some traders may have given voice to the Legg Mason view through long call spreads at the October 27.50/32.50 strikes. In this case the trader would have bought the 27.50 calls for $3.30 and sold the 32.50 calls for 85 cents, creating a debit spread that would break even for the buyer at $29.95 – just below the initial Microsoft bid.
C– Citigroup shares are holding on to a .88% gain this morning to $23.97, bucking the trend in the XLF, on news that the company is nearing a deal to gird its balance sheet through the sale of $12 billion in leveraged bonds and loans to a private equity consortium. The news appears to have elicited brisk interest in calls at the 25 strike, which traded to buyers and sellers in the April contract, and to the middle of the market in May. Let it be said, however, that the tendency among option traders to second-guess otherwise affirmative deal news via out-of-the-money puts (a tendency we saw earlier this week when Washington Mutual’s PE deal was taking shape) is also in evidence at Citi. Puts at the May 17.50 strike have traded on a volume of more than 19,000 lots, bought mostly on the offer for 23 cents – a position that starkly implies a break below the $18 52-week low heading into next month.
CHS– Shares in women’s clothing chain Chico’s slid 2.5% to a new 52-week low of $6.62 today after an analyst lowered his price target on the share. Chico’s shares have surrendered more than a quarter of their value so far this year. With options trading at nearly 5 times the normal level, traders sought to enter new long positions at the May 5.00 put strike for 20 cents per contract, suggesting continued erosion below current levels even ahead of the company’s quarterly earnings report on May 28. Implied volatility at 74.6% is elevated above the 69.7% historic reading, consistent with what today’s volume implies about forward-looking risk to Chico’s shares.
NSC– Norfolk Southern Corp. – Shares in the country’s fourth-largest railroad dipped 2% to $55.64 today on a warning that its Q1 earnings would likely take a 2-cent hit on charges relating to the class-action settlement of a 2005 train derailment in which nine people were killed. With options trading at almost 5 times the normal level today, the number of puts traded is more than triple that of calls. Buyers have been drawn to the May 55 and 55 put strikes, the latter commanding premiums of $2.65. Buying interest at the May 60 call strike for $1.35 could indicate some strangle activity in play, though the $4 total cost of the 55/60 strangle here would require a break past $64 or below $51 in order to generate profit for the buyer. June 45 puts which traded on a sum volume of some 16,650 lots for 65 cents apiece may have represented the closeout of prior open positions.
BBBY– Shares in Bed Bath & Beyond declined 3.6% to $29.87 and option volume advanced to 4 times the normal level after the housewares emporium was on the receiving end of an analyst downgrade just hours before its quarterly earnings were due out. Implied volatility on Bed Bath & Beyond options, which rose 11% this morning, shows option traders looking for nearly 25% more price risk to its shares over the next month than it has already documented, while the price of the at-the-money $30 straddle shows current premiums pricing in as much as a $2.75 move (9%) on back of the earnings report. Puts are outmoving calls by more than 7 to 1 this morning, with some early profit-taking in April 30 puts offset by heavy put buying May puts at strikes 27.50 and 30, extending into the August contract as well. Option traders hold more than two and a half times as many put positions as calls in Bed Bath & Beyond, a proportion that has steadily widened since February, when the number of open put to call positions was roughly even.
