Today’s tickers: NRG, SIRO, IYT, XLE, INTC, GIS, EK, CLR, MDT, FO, RRI, HNT, PEIX
NRG– Shares in independent power producer NRG Energy dove 4.4% to $42.15 today on an analyst downgrade out of Credit Suisse. The increase in option trading volume registered on our market scanners this afternoon may have been occasioned by a trader rolling a 20,000-lot position in June 45 calls – which lost 70% of their value in the wake of the downgrade – into the September 45 calls, which traded to the middle of the market at 45 cents.
SIRO– A quirky sector play emerged today in the form of dental technology stock Sirona Dental Systems Inc., the maker of clinical hygienic equipment and imaging systems. We make reference to today’s 50-fold increase in option trading volume as a “sector play” as it comes one day after an unusual uptick in bullish positioning in Invisalign braces maker Align Technologies. Today’s 6,300-strong volume in Sirona compares to open interest of just 4,500 lots, and while implied volatility at 41% shows a slight notch above the 39% historic reading, it appears that option traders are selling volatility via the July 25 straddle, pocketing the $3.55 premium at the at-the-money line in anticipation of range-bound share price activity over the next couple of months. Fresh volume at the September 30 line traded to the middle of the market at $1.35. Shares closed 1.4% higher at $26.03.
IYT– Shares in the iShares US Transport Index, a closed-end fund which tracks Dow transportation components including FedEx, UPS and JB Hunt, showed minimal downside, down .88% to $95.85. With implied volatility neck and neck with the historic 22% reading, it looks as though the increase in option trading activity to 14.5 times the normal level was the result of traders deploying a collar strategy in the September contract to protect long positions in the underlying stock. They may have done this by buying puts at the September 85 strike for $2.85, and funding that purchase in part by writing calls at the 105 strike for $2.30. The upper strike call represents the price at which the trader in question would willingly part with the long stock position for a nicely enhanced yield some $6 above the 52-week high.
XLE– Shares in the oil ETF are up .85% this afternoon to $90.27, inching past the latest 52-week high. Earlier today, a massive 152,400-lot put spread went through this morning in the June contract, with the June 84 put strike trading for $1.69 and the 87 strike trading for $2.65. The was an apparent credit spread in the puts, with the trader taking a 96-cent credit on the trade in a bullish bet on the direction of the ETF that comes as no great revelation in the midst of another day of nosebleed-high oil prices. The trader in this case hopes both puts will expire worthless due to continued upside in the price of the underlying past the strike prices indicated, and that the spread between the strikes will narrow.
INTC– Shares in Intel closed 3% lower at $24.06 on a down day for chip stocks. An early bias among option traders to position defensively in Intel puts may have extended from concerns that the recent earthquake in China may have some impact on Intel’s plant in Chengdu, which handles more than a quarter of Intel’s packaging and testing functions. An early blurb from AmTech on Briefing.com this morning surmised that while there was no material impact to its business and no significant damage to the plant, the facility might not operate at full capacity for some time. In any event, option traders sought long positions in June 24 puts, extending into the July contract at the 24 and 25 strikes, consistent with a defensive posture on its share price prospects.
GIS– Inflationary concerns led to at least one knee-jerk reaction to seek defense against declines in a major food maker. This occurred in the options of General Mills, where shares closed flat at $61.93, but an early increase in option trading activity to nearly 3 times the normal level occurred squarely in October 65 puts. While the strike here is nominally in-the-money, the price of the contract at $5.20 demands a break below $59.80 – that’s more than $2 below the current share price – just to break even.
RRI– Shares in Reliant, the Texas-based provider of non-utility electricity service to 1.8 million retail and wholesale customers, rose 2.5% to $24.92 today after analysts at Credit Suisse upgraded the stock to “outperform.” Shares have turned in a relatively flat performance over the past year (compared to sector peers), chalking up marginal declines of 4.8% for the year to date, and 7% for the past 52 weeks. But movement could be in its midst, given the apparent interest in the July 25 straddle, which traded to the middle of the market for $2.60. This could be regarded as a cheap bet for a long volatility player, as the upside breakeven would still leave Reliant Energy $3 below its 52-week high. Today’s straddle volume sent option volume to more than 25 times the normal level.
HNT– Early morning deal scuttle involving a would-be bid for managed health care provider Health Net by Aetna sent shares 7% higher to $29.33 as option volume surged to 24 times the normal level due to a rash of buying in June 30 calls. The more than 37,000 lots trading at this strike compare to open interest of no more than 4,000 lots prior to today. The put side of the equation also attracted traffic of more than 8,800 lots. Implied volatility on Health Net options rose nearly 57% on the news but at 42% still ticks in modestly below the 44% historic reading. Today’s volume matched up to nearly all of its open interest. Health Net shares have lost more than 41% of their value so far this year.
PEIX -A recalibration of market sentiment on ethanol companies continued for a second session today as witnessed in the option activity of Pacific Ethanol, the West Coast producer whose earnings surprised the market positively yesterday. Shares closed 6% higher at $5.45 and implied volatility receded sharply to around 98%, falling below the historic barometer. Earlier today Pacific Ethanol was one of the top volatility gainers on our platform. Meanwhile, a 25-fold increase in option trading volume appeard centered in June 5 and 7.50 calls, trading to buyers and sellers in excess of open interest.
EK – For a second session since its May 1 earnings report, option traders in Eastman Kodak are showing an unlikely penchant for out-of-the-money call strikes as implied volatility shows particular acute price risk over the next 30 days. On May 9, Eastman Kodak options piqued our market scanners with an 11-to-1 overweight of call volume accompanied by a 30% move higher in implied volatility. This morning the reading of implied volatility once again spiked 28%, with the sway toward calls even more pronounced at 24 to 1 against puts. Once again option traders appear to be favoring the 17.50 and 20 strikes, the latter strike trading already in excess of open interest, which would seem to rule out the simple closeout of positions opened on May 9. This interest in calls was particularly eye-catching given the modest .29% increase in share price to $17.00.
CLR– Shares in Continental Resources blasted 24% higher this afternoon to $63.35 – a new 52-week high – on news of the completion of a well in North Dakota’s Three Forks/Sanish formation. The news comes just two weeks after Continental Resources reported a 64% gain in Q1 profits. Interest in its options surged to more than 4 times the normal level, with the 22,000-strong volume comparing to a total open interest of just over 4,500 lots. Noteworthy in this respect was what appeared to be call spread activity in the September contract with the 50 calls trading for $14.40 and the 65 calls trading for $7.30. The trader in this case may have bought the lower strike calls but pared the cost of the now deep-in-the-money strike by selling the higher strike for $7.30.
MDT– Shares in Medtronic, the medical instruments maker, rose 2% to $48.86 after the company reported that its drug-coated Endeavor stent generated $81 million in U.S. sales in the fiscal fourth quarter. Implied volatility on all Medtronic options contracted 30% as option volume accelerated mightily, with twice as many calls trading as puts. While heavy volume was reported at the June 50 strike, we observed volume of nearly 4 times the open interest occurring at the 47.50 put strike in the front month. The price of this strike is down nearly 62% on the session.
FO– Earlier today it was announced that a New York courtroom had rejected claims by Fortune Brands, the diversified consumer brands company, seeking to block the acquisition of former Swedish government liquor monopoly Vin och Sprit (maker of Absolut Vodka) by France’s Pernod Ricard. Reuters’ Stockholm bureau reported that Fortune Brands had filed lawsuits in Stockholm and New York. Shares turned moderately lower, down .64% to $71.05, but option volume surged to more than 29 times the normal level due to what looks like ratio put spread activity in the July contract. In this case it would make most sense for the trader to sell 2 of the July 65 puts for 55 cents to fund some of the purchase of 70-strike puts for $1.90, creating a debit spread between strikes that the trader would like to see widen and both contracts exercised.
