Today’s tickers: : PEIX, VSE, ZLC, XLE, YHOO, TGT, TRMS, BGP, STI, ECL, GES, PVH
PEIX– After a rough 52 weeks for ethanol producers, an earnings surprise by Pacific Ethanol this morning turned option traders’ attentions toward the outlook for upside in the broader sector. Pacific Ethanol options themselves traded at more than 21 times the normal level as shares closed 63.4% higher at $5.23, and while implied volatility came off sharply earlier today, its continued high elevation (113%, which measures the likely share price fluctuation over the next 30 days compared to a historic record of 78% for the underlying shares over the past year) suggests that the market is roiling as its contemplates a new equilibrium price for the stock. The fact that 4 times as many calls are moving as puts suggests this risk lies to the upside. June calls at the $5 and $7.50 strikes have traded freshly on volume of more than 1,000 lots each – the price of the $5 strike increasing 300% on back of the earnings surprise, and the 7.50 strike drawing volume even as the 15-cent price tag suggests just an 11% chance of a breach of the $7.50 line by June’s expiration. Pacific Ethanol shares traded as high as the $15 level last July, but have come off sharply since then, registering a more than 67% drop in value over the past year and gapping well below the performance of the Russell 2000 Other Energies Index.
VSE– Enthusiasm over Pacific Ethanol’s earnings was infectious today, as the upside caught on in shares and options in sector peer VeraSun Energy. Like its West Coast counterpart, VeraSun’s earnings have gruelingly depreciated over the past year, down more than 57%. Today its shares gained 18.7% to $7.35 and, similar to the setup in Pacific Ethanol, the marked disparity between implied and historic volatility (85% implied volatility versus 69.3% historic) suggests the market is taking the opportunity for a larger rethink on the valuation of its shares. Options to buy and sell VeraSun shares traded at 12 times the normal level, according to our market scanners, with action in June calls at the 7.50 and 10 strikes offset by what may be more directionally neutral volatility plays in the December contract at the 5/7.50 strikes. Heading into today, option traders had held 1.6 times as many puts as calls.
ZLC– Options in Zales, the country’s largest jewelry chain, moved at more than 7 times the normal volume today ahead of Thursday’s earnings numbers. Shares showed marginal price movement, closing 2.6% down at $20.30. Earlier today, implied volatility on all Zales options brushed 60% – a 22% gap above the historic reading – and option traders promptly seized the opportunity to sell volatility via the June 20 straddle for $3.00 – at 14% of the current share price, this reflects the magnitude of price move that the option market was pricing at that time. Volatility doubled back later in the session and now reads 52%. Until last Friday’s expiration, the number of open put positions to calls totaled some 4.4 to 1 – with many of those contracts falling by the wayside with the passing of the May contract, the ratio of puts to calls is slightly less extreme at 2.8.
XLE– This morning’s stubborn elevation in the price of oil for future delivery defied pledges of a 300,000 barrel-per-day supply increase by Saudi Arabia. Shares in the ETF that tracks major oil producers closed .51% higher at $89.40, still a 52-week high, and with some 142,000 options trading this afternoon it was one of the most heavily trafficked tickers on our platform. A tendency among traders to hedge long positions, or protect against an anticipated correction, appeared via the nearly 2-to-1 overweight of puts shown in volume. A closer look at the option chains shows some divergent thinking. Puts bought at the out-of-the-money June 82 strike for 96 cents this morning may be the closeout of puts shorted for $1.66 last Thursday. Similar 3,000 lot volumes at the September 81 put line and 96 call line suggest a trader may have used a short collar position, buying the calls at $3.15 and selling the puts at $3.10, to protect an underlying short position in the ETF.
YHOO– News over the weekend that Yahoo and Microsoft had returned to the bargaining table for talks on a “strategic online partnership” not involving a total acquisition had minimal impact on Yahoo’s share price. Shares closed .14% lower this afternoon to $27.62, but with some 330,000 options trading by day’s end, we saw puts and calls trade at near parity, despite an early morning glut of put volume at the July 27.50 strike. A 57,000-lot chunk of volume here traded to the middle of the market, making directionality a tough call, but we can confirm that they were transacted in one fell swoop for $1.66.
TGT -Target shares closed a skinny .07% higher at $54.92 ahead of EPS tomorrow, with implied volatility at 31% showing a characteristic pre-earnings elevation above the 26.4% historic reading. June puts were active earlier today at the 50, 52.50 and 55 strikes, trading mostly to sellers. While the price of the $55 straddle at $4.18 shows the options market looking for as much as a 7% up-or-down move on back of the numbers, but the preponderance of premium sellers in the front month suggests some traders may feel the volatility elevation here is overdone.
TRMS – Is the hour of reckoning soon at hand for Trimeris? Option activity and implied volatility are unusually stretched in this biotech, whose recent dramatic historic includes patent infringement suit by Novartis over its AIDS drug Fuzeon. The ongoing suit has bamboozled its efforts to find a buyer, even as its executives have continued efforts to wind down the company’s operations. To that end, earlier this month it announced a special cash dividend. A litany of recent analyst speculation has centered upon the kind of price the North Carolina-based company could reasonably command – some estimates have put the figure at as much as $9 per share. This may go some distance in explaining the huge 106% implied volatility reading, which dwarfs the 68% historic reading. An increase in option trading volume to more than 61 times the normal level, with action at the June $7.50 line indicative of at-the-money straddle activity that suggests a resolution of its fate may come sooner rather than later. Both the calls and puts traded to the middle of the market for a combined premium of 95 cents. A buyer would be looking for a swift yea-or-nay on a sale, while a seller would look for shares to continue to tread water for at least the next month, pocketing the richer premium into the bargain. Shares closed 5.5% higher at $7.64 this afternoon.
BGP– Shares in beleaguered click-and-mortar bookstore chain Borders closed 4% lower at $6.44 this afternoon, still loitering near its lows in a year that has seen investors throw the book at its franchise concept, depleting shares of more than a third of their value as the company has struggled to find a buyer. Earlier today it was reported that Borders was consulting investment bankers in the U.K. regarding a possible sale for its British-based Paperchase chain of stores. This may have heightened interest in options tied to its shares, which moved at 18 times the normal level as implied volatility shows a contained, two-percentage-point elevation above the historic reading ahead of next week’s earnings. Early session activity appeared tied up in call-spread activity not necessarily consistent with a bullish point of view. January ’09 calls at the 7.50 strike were mostly sold for $1.45, while calls at the 15 strike traded to the middle of the market for 10 cents. If we conclude that the out-of-the-money strike was in fact sold, the resulting transaction would create a $1.35 credit representing the maximum profit to be gained assuming Borders shares are still below $7.50 come January. In this case, the trader would pocket a premium amounting to 20% of Borders’ current stock price on the assumption that the price goes nowhere or lower.
STI– Before-the-bell scuttle held that an unnamed European bank might make a bid for Suntrust, sending options volume to nearly 5 and a half times the normal level. Shares closed 1.2% higher at $56.65 today, but implied volatility has moved surprisingly little and at 39% actually comes in below the 42% historic reading. While June 60 calls were mostly bought on a volume of about 5,000 contracts, nearly half today’s active option volume occurred at the June 65 call strike, where some 14,000 contracts have traded evenly to buyers and sellers.
ECL– News that a major institutional shareholder, Germany’s Henkel AG, might be looking to divest its 25% stake in the company failed to elicit much enthusiasm in Ecolab, the world’s largest producer of cleaning chemicals for the hospitality industry. With shares trading 2% lower at $45.75, an increase in option trading activity to more than 8 times the normal level involved fresh positioning in June 45 puts, which traded mostly to buyers at $1.10 apiece, suggesting imminent downside risk to the company’s shares. Implied volatility rose 26.5% on the news, making Ecolab one of the top volatility gainers of the early session.
GES-Very minimal share price action coupled with unusual option activity drew our attention to clothing brand Guess today. Shares closed 1.9% lower at $41.20. Earlier today we observed its option activity more than triple, with fresh call volume at the out-of-the-money September 55 line trading to the middle of the market at $1.17. We wonder if this represents covered call writing, with the autumn contract shrewdly chosen as the last time Guess? shares tested the $55 level was mid-October. It was on October 17 that shares hit their 52-week high of $54.98. Also noteworthy is the sizable elevation in implied volatility on all Guess? options. With implied vol ticking in at 57%, the option market is bracing for a third more price risk to Guess? shares over the next 30 days than they have shown over the past year – a divergence which really began in earnest just 3 weeks ago.
PVH– A similar strategy of covered call writing may have been deployed in options of another fashion retail name, Philips-Van Heusen, the owner of the Kenneth Cole, Bass, BCBG Max Azria and Sean John brands. Implied volatility at nearly 47% shows a suitable elevation above the 41% historic reading ahead of its earnings after the bell tomorrow, but the increase in option trading activity to triple the normal level occurred not in the front month (as one might expect from an imminent earnings report) but in December 60 calls. These traded freshly to the middle of the market for $2.28, a strategy that would make sense for a trader looking to pad the yield on an underlying short position by setting an out-of-the-money price target: especially if the trader went long Philips van-Heusen at or around April 23. Shares in the company have gained some 35% in value since then alone.