Today’s tickers: DRYS, SNY, YHOO, HNZ, SLE, ALL, SINA, DGL, TIN, CSCO, RIMM
DRYS– Option traders following the dry bulk shipping industry are getting a headstart on a big move from Dryships, ahead of its earnings on Monday. Earlier today Bloomberg reported that the Baltic Dry Index, which tracks commodity shipping rates, hit a new record as Chinese demand pressures have collided with a limited supply fleet. Shares rose nearly 6% to $104.90, and a look at the gap between implied and historic volatility shows option traders bracing for even rockier seas. The 75% implied volatility represents a 15% elevation above the historic level, and this reading could rise even further as Monday’s after-the-bell earnings announcement is imminent. With twice as many calls trading today as puts, it’s tempting to suppose that the consensus is for further upside, but it is worth noting that puts at the 100 and 105 strikes have traded well in excess of open interest today, trading mostly to buyers, and principally in the May contract, which expires tomorrow (before the earnings announcement). These may be long volatility positions going through in combination with calls at the same strikes, or simple defense against a Friday pullback in the share price.
SNY– Shares in French drug giant Sanofi-Aventis rose 2% to $38.29 today on news that it plans to ask FDA officials to reopen their application for heart drug Multaq. FDA regulators rejected the drug in 2006. Option volume increased to more than 25 times the normal level, with most of this concentrated in June 35 calls, which traded to the middle of the market on volume of 9,000 lots for $3.30. If these were long positions, the breakeven on the contract would suppose a return to late-January/early-February price levels for Sanovi-Aventis shares within the next month.
YHOO– Yahoo! – Shares rose 1.2% to $27.48 on news of Carl Icahn’s blueprint for a proxy fight that could force Yahoo to return to the deal table with Microsoft (…IF they’re willing!). Implied volatility pulled in by more than 25% as the market seemed assured that with Icahn at the helm, the hemming, hawing, and hand-wringing over Yahoo’s fate won’t last much longer. Option traders put nearly 358,000 options in play by mid afternoon. Earlier today we observed an early long volatility play that could indicate a trader taking the other side of the volatility pullback. It appeared to us as though a 7,160-lot position went through in the June contract at the 27.50 call strike and the 22.50 put strike. The low, 17-cent price of the out-of-the-money put would limit the cost of the trade to $1.82 (about 6% of the current share price), and protect the buyer in the event of a break above $29.32 or below $20.68 – an indication of “do or die” thinking among investors on back of Icahn’s move.
HNZ– Defensive activity returned to options in global food brand H.J. Heinz today despite meager share price action in the form of a .35% decline to $48.43. Shares in Heinz have staged an impressive – if ketchup-slow – 15.5% recovery since hitting a 52-week low of $41.90 back on February 6, and today’s 9-fold increase in option trading activity may be the result of a shareholder who entered Heinz at that low point looking to protect those gains. The 14,000-lot position entered in December 50 puts was bought for $4.00 – no mean price to pay for protection, as even though the strike price is nominally in the money, the share price must drop 5% from current levels just to break even on the trade expense. Some uncertainty about the upshot for Heinz shares is apparent from a look at the disparity between historic and implied volatility – while these readings were neck and neck as recently as late April, the implied volatility reading used in the pricing of options has diverged slowly but surely higher and now shows option pricing in 46% more risk over the next month than Heinz shares have shown historically.
SLE-Unusual option trading activity – albeit skewed to the bullish calls – was observed in a second food maker, Sara Lee. Shares in the maker of bread and baker goods are trading flat-to-lower at $13.83, but a 5-fold increase in option volume appears concentrated in January calls in seeming anticipation of a recovery higher. The 6,500 lots traded at the January 15 strike were bought for $1.50 today. It is worth noting that since its test of the $18 level last June, Sara Lee has not traded near the $18 level this year.
ALL– Options in Allstate Corp, the country’s second-largest home and auto insurer, are trading at more than 9 times the normal level as shares trade .42% higher at $50.42, one day after the company was denied an appeal of its suspension in the state of Florida. At issue is the company’s policy of canceling coverage for some home owners in that state due to hurricane activity, and the suspension came after Allstate reportedly ignored subpoenas for its policy records. The bump higher in option trading activity shows ratio put spreaders positioning for modest declines heading into the new year, staggering their exposure proportionately across different strike prices in order to control trade costs. This appears to have been done by selling 2 puts at the January 45 strike for $2.27 in order to defray the cost of buying at-the-money puts at the 50 strike for $4.35, even taking a meager 19-cent credit on the transaction.
SINA– Sina Corp Inc. – American depositary receipts in China’s largest Web portal rose 7% to $56.91 in US trading after the company reported an 87% increase in Q1 profits, drawing an analyst upgrade from Citigroup. Implied volatility promptly fell 22% with the market more assured of the company’s prospects, and while today’s 5-fold increase in option trading activity shows 3 times as many calls in play, we noted that while much of the call activity shows two-way traffic – particularly in May calls at the 60 strike – suggesting short-term speculative plays, traders have also sought long positions in May puts at the 45 and 50 strikes, perhaps mindful of the propensity of Chinese online stocks to swing both ways.
DGL– Powershares DB Gold Fund – Shares in this gold-indexed ETF registered a 2.5% rise to $32.95 today, in tack with a rise in the price of gold for future delivery that followed higher-than-expected initial jobless claims and softer-than-expected New York area manufacturing data. The increase in option volume to nearly 13 times the normal level involved a fresh, large position initiated at the out-of-the-money June 35 calls, which traded to the middle of the market at $2.15. The 10,000 lots involved at this strike equal nearly half the open interest in the entire ETF as of today’s count. It is worthwhile to note here that, assuming the contracts were bought, the break-even point would require shares in the ETF to move past $37.15 by expiration. This would put the ETF within about a quarter of the 52-week high it set back on March 17, when the stock market established its nominal bottom.
TIN– Have takeover rumors returned to paper maker Temple-Inland, or is the market simply ready to turn a fresh page, just two weeks after a bruising Q1 loss? Carl Icahn-watchers may recall that it was under pressure from Icahn himself that Temple-Inland divested its timberland, financial services, and real estate holdings. While that hasn’t contained losses in its share price – Temple-Inland shares have lost nearly 30% of their value this year – the company did draw an analyst upgrade earlier this month, with Citigroup citing the likelihood of higher container board and wood products by next year. In the meantime, the company has been the target of unsubstantiated takeover chatter, most recently after its April 29 earnings report, and following a February news story suggesting that Georgia Pacific might be in the market to take over some of Temple-Inland’s assets. Today, with options trading at nearly 6 times the norm, call volume has already outstripped the level recorded on April 30, when takeover rumors last flared up. Today’s activity involved fresh buying in out-of-the-money calls at the $20 strike in the August contract, where traders paid 25 cents for the right to buy Temple-Inland shares for $20, and again in the November contract, where the position cost 60 cents. Today’s active volume equals nearly half of the total open interest.
CSCO– Cisco – With the market now “over” the mixed-blessing of its ambivalent earnings report last week (quarterly numbers were better than expected, sending shares sharply higher in after-hours trading, gains given back after the market thought better of its cautious outlook), but with shares 1.75% higher at $26.20, we observed some quirky long positions in out-of-the-money that seem inconsistent with the market’s verdict on Cisco as recently as 1 week ago. Calls are outmoving puts today by nearly 6 to 1, with heavy action at the May 26 call line possibly due to the closeout of contracts ahead of expiration. But fresh buying was noted at the $35 strike in two separate contracts – the October call was bought for 10 cents on a volume of more than 2,000 lots, while more than 15,000 lots were bought on the offer at the January call strike for 35 cents. Both positions would require a break of Cisco’s 52-week high of $34.24.
RIMM– Research in Motion – A new research report by firms IDC and Strategy Analytics suggesting a rough road ahead for traditional handset makers (such as Motorola) as U.S. consumers continue to embrace smart phones may have contributed to a .94% rise to $139.79 in shares of Research in Motion. A slight elevation in implied volatility (42.6% compared to a 40.6% historic reading) appears to have drawn brisk two-way traffic in excess of open interest to the $140 line, with relatively more buyers of contracts on both the call and put side of the equation. Twice as many calls are trading overall today as puts.
