NKE– “Swoosh” went the sound of short volatility this afternoon as option traders took advantage of a momentary blip higher in implied volatility of athletic shoe giant Nike. Shares pulled back 2.5% to $65.10 on no apparent news catalyst today as implied volatility ticked in at 26% – slightly above the 22.8% historic reading. An increase in option trading volume to 8 times the normal level showed traders keen to write the January 65 straddle for a combined premium of $12.10 – fully 18% of the current share price – exceeding existing open interest at the January line. The short straddle strategy is a popular one among traders anticipating minimal share price movement within a given timeline – the trader in this case wagers that Nike shares will remain at current levels heading into the New Year, leaving both positions unexercised.
BJ– This morning’s better-than-expected April sales figures from the likes of Wal-Mart and Costco affirmed the notion that cash-strapped American shoppers are on the hunt for bargains. While the news was good for shares in some big-box retailers, the gains weren’t wholesale. BJ’s Wholesale Club, the East Coast discount and remainders chain, is an instructive case in point. With shares down 2% to $38.15, option volume soared to nearly 9 times the normal level as traders took a defensive stance by positioning in June 40 puts. These puts, which convey the right to sell BJ’s Wholesale Club shares for $40 next month, are nominally in-the-money, but the $3.45 premium requires another $1.60 drop from current levels just to break even. Consider the volatility setup, where the 44% implied volatility reading indicates more than 25% more price risk to the company’s shares than have been proven historically.
FCX– Freeport McMoRan Copper – Shares in the world’s largest publicly traded copper company rebounded 3% to $117.85 after declines earlier in the week on labor issues and concerns of a slowdown in Chinese demand owing to prohibitively high copper prices. The 10,000 lot position in the January contract that we observed earlier today appears to have involved the sale of 110 puts for $15.43 and the purchase of 130 calls for $13.60. This suggests a short collar strategy employed by a trader with a short position in the underlying stock who wants to protect the position against an unexpected move higher. The purchase of the out-of-the-money call is funded by the sale of the out-of-the-money put – and in this case the trader even pockets a $1.83 credit on the transaction. Shares of Freeport McMoRan have risen 64.5% over the past year, trading as low as $70.94 and as high as $118.65 during that time.
IVN– Meanwhile, shares in Ivanhoe Mines, which is active in copper, gold and coal mining in Asia, recovered 1.4% of their value to read $9.47 this afternoon, fresh off yesterday’s declines on the announcement of a $7 million investment to boost its share of Australian copper explorer Exco Resources. The 8-fold increase in option trading volume we observed today appeared in January 15 calls, these more than $5 out-of-the-money, which traded to the middle of the market for $1.05. It seems well within the realm of possibility that an option trader decided to sell those 25,000 calls against an underlying share position, taking advantage of a 23% increase in the premium attached to that strike on back of the share price movement, and well aware that Ivanhoe shares have tested the $15 level on just two occasions in the past 52 weeks before falling precipitously again. Ivanhoe Mines traded past the $17 level in July 2007 and again in November – the setup for a similar rally was observed in late February, but Ivanhoe’s share stalled at $13 and took another nose lower. The trader in this case may be betting that a year-end rally in Ivanhoe, like a carnival hi-striker, will fall short of the January strike price, allowing him or her to pocket the premium risk-free – or, if exercised, hand over the underlying shares at a generous premium to current levels.
CSCO– Cisco – Shares in the network hardware maker extended yesterday’s post-earnings doldrums with a flat reading at $25.78 this afternoon. But while shares seemed to respond to a muted forecast for sales over the next two quarters, some option traders took the contrarian tack this morning by buying heavily into June 29 calls. The 11,000-lots traded here represented some 16% of the total morning volume in Cisco, which continues to rank among the most actively traded on our platform. These contracts, which cost a meager 15 cents apiece, look like a bold bid on a return to price levels not observed in Cisco since late December. Elsewhere it appears that a 5,000-lot straddle position may have been deployed at the July 25 line, but we have no information on the directionality of the trade.
CROX– – Crocs – Is this a sucker’s reprieve for the fad shoe maker, or signs of renewed life? Shares gained 15% to $11.42 on higher-than-expected profit guidance. But while the plasticized shoes continue to attract wearers in the form of kids, nurses, and casual comfort-seekers, its share price remains wedged barely $2 above the 52-week-low, having traded as high as $75.21 over the past year. We wonder whether Crocs is vulnerable to the one-two punch of fickle fashion tastes AND higher production costs in the form of petroleum by-products. Some option traders may be wondering the same thing – while call volume outflanks that of puts by more than 3 to 1 this morning, the only real one-sided buying action occurs at the in-the-money May $10 strike. Traders have readily taken both sides of the trade at call strikes 11, 12 and 13 in the front-month contract.
JAH– Jarden Corp – Option traders have turned volatility sellers in this niche consumer products maker. Shares in the company, whose array of products ranges from coffeemakers and animal grooming products to snowboards and camping gear, declined more than 10% after posting better-than-expected quarterly profits, but net sales fell short of analyst consensus. In a statement, the company’s CEO said that the current recessionary environment was having “a negative impact” on consumer confidence and retail sales. With shares at $21.05 – within a buck and change of the 52-week low – implied volatility at 53.4% continues to show a 25% elevation above the historic reading, which hints strongly that option traders feel the full impact of the earnings report hasn’t been priced into the stock. This kind of discrepancy tends to pad premiums, and it looks like the 10-fold increase in option volume may be due to traders selling that fortified premium in the October contract at the 20 put line (for $2.30) and the 25 call line (for $1.20). Jarden shares have been rangebound between those two strike prices since late-February, and sellers of those contracts expect them to remain so heading into the fall.
ENER– Energy Conversion Devices – Options volume in this Nasdaq-listed maker of thin-film solar laminates that convert sunlight to energy surged to 24 times the normal level this afternoon. Shares in the company, whose products are marketed under the Uni-Solar brand name, soared more than 39% to a new 52-week high of $48.52 after its Q3 profits soundly beat street expectations and delivered in-line guidance for Q4. With the equivalent of more than three-quarters of its open interest in play, trading 3 times as often to calls as to puts, traders are playing the short-term on Energy Conversion Devices, with fresh two-way traffic in calls at strikes of 45 and 50.
PSUN– Pacific Sunwear of California – Shares in the surf-themed teen apparel label known as “PacSun” reversed gains to trade .24% lower at $12.34 after reporting a 4% rise in same-store sales for the month of April, lower than analysts had anticipated, as a rise in spring clothing sales was cancelled out by lower accessories and footwear sales. Option traders sent volume to 7 times the normal level, with more than half today’s volume concentrated in June 12.50 calls, which traded 11,000 times at around $1, in excess of open interest.
