Today’s tickers: DLTR, HPQ, CCU, STZ, WNR, CSIQ, FLR, FOSL, AIG
DLTR– Broad market action yesterday suggested that big-box retailer Wal-Mart would breeze through the quarter on ever-hastening consumer retrenchments, continued demand for bargains, and its own aggressive offer to cash government tax-rebate checks to traffic from other discounters in the retail space. But it was a cautious forecast – delivered with a sober warning on the impact of high gasoline prices on customer traffic to Wal-Mart’s sprawling store locations – that sent its share price lower, even despite relative strength in this morning’s retail sales number. Maybe these discount retailers aren’t in the catbird seat after all. We wonder if the newly circumspect rethink on the space is to blame for sudden wave of defensiveness in option activity of Dollar Tree, the discount variety store chain whose locations and clientele dovetail nicely with Wal-Mart’s, but whose merchandise is sold for $1 – a great price point for an ailing economy, but not so much for customers shelling out $4 per gallon of gas to get to the parking lot. Shares are down .70% at $35.25, and while the company isn’t due to report earnings until late-May, we observed an increase in option trading activity to some 4.5 times the normal level. This appeared to involve bearish ratio put spreads at the 32.50 and 35 strikes, with a trader selling twice as many June 32.50 puts for (appropriately enough) $1 apiece in order to buy puts at the 35 strike for $2.10. The strategy implies limited downside from current levels following its earnings report on May 28.
HPQ– Confirmation of the PC and printer maker’s acquisition of data systems operator EDS has Hewlett Packard shares ticking in 6.4% lower at $43.83 this morning. Implied volatility on its options remains elevated at 32.3%, suggesting 14% added price risk to its shares in the coming 30 days than has been proven historically. Early on we observed a hike in option trading volume to 6.5 times the normal level, with heavy trading in June 45 and 47.50 calls in excess of open interest. Volatility traders in Hewlett-Packard appear drawn to the August 45 line, where a 10,000-lot straddle may have gone through. The combined price of this position costs $5.35 this morning, and with both sides trading to the middle of the market we cannot establish directionality. Calls and puts in Hewlett-Packard as measured in its 608,000-strong open interest were evenly split heading into today.
CCU– An early-morning break in courtroom settlement talks concerning the buyout of radio broadcaster Clear Channel sent implied volatility momentarily higher by some 82%, but this quickly receded as talks presumably resumed. With shares 1.2% higher at $33.25 ahead of the noon hour, its option remain heavily trafficked, particularly in the July contract, where it appears that 5,000-lot spreads may be going through in the calls at strikes 32.50 and 35. Comparable volumes are going through in puts at the 22.50 and 25 strikes.
STZ– One day after its executives were slated to present at a Goldman Sachs consumer brands event, investors must’ve liked what they heard from Constellation Brands. Shares are 9.3% higher at $20.57 in the company, which owns Effen Vodka, Caravella Limoncello, Paul Masson VSOP Brandy, Corona and St. Pauli Girl beers and other brands. With options trading at more than 27 times the normal level, it looks like some traders were seeking to protect gains in the stock by buying puts at the May 20 line for 25 cents. The cheap price of the position offers economical insurance given the limited time value and depleted value of puts for a trader long the stock and hoping to protect gains.
WNR– Shares in Western Refining tanked more than 18% to $8.08, cratering below the prior 52-week low, as higher crude oil costs ate away at its earnings. The degree to which the market was caught wrong-footed by the enormity of Western Refining’s loss is apparent from a look at the implied volatility reading of its options, which at more than 109% continues to dwarf the 72% historic reading. Options are trading at nearly 9 times the normal level with more than twice as many puts trading as calls. Traders have made a jump-dive to protection in May and June 7.50 puts, with volume at both these strikes well in excess of prior open interest and despite the fact that this level of price insurance is more than twice as costly to obtain today as it was yesterday. Heading into today’s session, Western Refining’s 56,000-strong open interest showed twice as many open call positions as puts.
CSIQ– Canadian Solar Inc. – Shares in the Ontario-based maker of solar module products rose some 22.5% this morning, blasting past the standing 52-week high, after reporting better-than-expected Q1 numbers and offering bullish guidance for Q2. With options trading at more than twice the normal level, we observed a brisk 2-way traffic in calls at the May 35 and 40 strikes as prices on those positions swelled as much as 445% (in the case of the latter contract). Put buying at the May 40 strike in excess of open interest suggests willingness among traders to part with $1 in premium for protection against a quick retracement post-earnings euphoria for this extremely volatile stock.
FLR– Fluor Corp. – Shares in the country’s largest publicly traded engineering firm rose 12.3% in early trading to $186.80, blasting past the prior 52-week high, after the company served up bumper numbers for Q1 and bullish guidance for Q2. The company has registered handsome demand for energy-related projects such as refinery engineering, driven by spiraling oil prices. Trading in Fluor options quickly accelerated to more than 5 times the normal level, and the fact that implied volatility at 38.6% still shows some elevation above the 37.4% historic reading hints that the option market is still looking for settlement price levels. Fresh 2-way traffic was observed in newly in-the-money May 185 calls, while front-month puts at the May 175 and 180 strikes also attracted buyers and sellers. Calls at the June 200 strike were mostly sold, establishing at least a workable indication of a top for Fluor shares in the coming months.
FOSL– Fossil Inc. – Record Q1 profits for the accessories and watchmaker failed to sustain an early-morning rally as its Q2 guidance fell short of market expectations, and Fossil shares are showing an 8% decline to $34.19 ahead of the noon hour. With options trading at some 6.5 times the normal level, much of the action is occurring at the June 35 call line, where contracts were mostly sold for around $1.90 this morning. The implied volatility reading on all Fossil options at 44.7% continues to show an elevation above the 39.4% historic reading, suggesting additional share price fluctuation over the next 30 days above and beyond what has been recorded historically.
AIG– American International Group – Options in AIG are extremely active ahead of its annual shareholders’ meeting, just two days after its staggering $.7.8 billion Q1 loss was unveiled, and following news that it has newly raised $11.9 billion through a common stock offering. With shares flat-to-higher at $38.47 ahead of the noon hour, news of the stock offering may have driven call-buying activity at the May 35 strike for $3.65, while the 40 strike calls have traded to buyers and sellers. The August contract has attracted buyers at the 40 call strike.
