Today’s tickers: ACI, MEE, WM, XLF, C, PXP, AMT, TMX, CTSH, PSUN
ACI– A raised price target out of FBR Capital Markets on coal companies stole some of the thunder from option activity in financials, citing the likelihood of continued strong demand and already tight supplies that, the analyst suggested, could coalesce in a near-doubling in the price target for metallurgical coal from $130 to $250. A bonanza of out-of-the-money call buying in Arch Coal’s October contract may have been stoked by news that its CEO Steven Leer is due to speak at the JP Morgan Basics and Industrials Conference tomorrow. With the share price up 4% to $67.50 by closing bell, option traders were zealous in locking in upside exposure, even on inflated premiums, and at very speculative strikes, with 3.4 calls trading for every put. Fresh long interest was observed in the October 80, 85, 90 and 95-strike calls, even with this latter strike pricing in a less than 1-in-4 chance of landing profitably by October.
MEE– Massey Energy, which drew a pointed bullish rating in today’s FBR report, likewise posted a new 52-week high with a 9.6% gain to $70.84, and the fact that implied volatility on all Massey options is showing a 16% elevation above the historic volatility reading on the stock indicates that there’s more price turbulence to come over the next month. With twice as many calls trading as puts, we can safely deduce that today’s sentiment favors the upside portion of that equation. Most of the call buying in Massey has taken place at the 70 and 75 strikes in the June contract, and at the 70 strike in July – note here that at $7.20, option traders are willingly forking over 10% of the current share price for the right to buy Massey at $70 – in other words, traders would need to see another 10% upside from current levels just to break even on the trade.
XLF– Financial Select Sector SPDR – New and turbulent revelations out of the financial sector greeted investors fresh out of bed this morning. An S&P downgrade of Lehman Brothers, Merrill Lynch and Morgan Stanley sent implied volatility in all three brokerages sharply higher, coming hot on the heels of news of Wachovia’s 86’ing of CEO Kennedy Thompson and the voluntary leave-taking of WaMu CEO Kerry Killinger. All of the above goes some way in explaining the upside disparity in implied volatility observed in the financial sector ETF, with option traders looking for about 25% more drama yet to come over the next month. With puts outmoving calls by a factor of 1.3, the tendency among option traders is accordingly defensive. Earlier today we observed that put spreads are the preferred vehicle for expressing this mood, with selling at the June 24 line for 56 cents and buying at the 25 line for $1.14 to create a 58-cent debit. XLF shares are 1.2% lower at $24.45.
WM– Shares in Washington Mutual responded with restrained downside, pulling off a flat close at $9.02 after trading weakly lower for most of the day. Still, the closing price today shows a negligible premium above the 52-week low of $8.71. What’s interesting to note here is the sustained elevation in implied volatility – at more than 71% it shows a conspicuous gap above the 55% volatility reading already charted into the stock: a rarity among financial issues, which have collectively gone to hell and back (or not), as it were, leaving option traders hard pressed to imagine what fresh hell could lie ahead. It appears that a trader used a tiered, ratio strategy in July puts. At the height of the trade were 2,500 lots at the deep-the-money July 16 put strike, which appear to have sold to the bid for $6.90, possibly against twice as many 10-strike puts which were bought for $1.53. At the bottom of this trade were about 10,000 lots bought for 44 cents. The sale of the upper-strike puts enables the trader to enter the transaction with an initial credit, realizing maximum profit potential with a drop below $5 in the stock.
C– – Citi shares closed 1.7% lower at $21.52 this afternoon, as implied volatility stayed roughly neck and neck with the historic reading. That said, a defensive posture settled on the July contract earlier today that jibes well with the action in the XLF, of which Citi is a component. Nearly a quarter of the 135,000-plus Citi contracts active by day’s end featured in July 20 puts, which were bought heavily for about 75 cents apiece. Option traders are pricing in about a 30% chance of Citi shares dipping below $20 at or before July 18.
PXP-Plains Exploration and Production – Ticking in at $73.81, the market drove shares to a 3.2% gain for PXP, the independent oil and gas company with activities in California, the Texas Panhandle, and the Gulf of Mexico. The company’s option activity rated among the most active by sheer volume thanks to some unusual out-of-the-money put spreads in the November contract that may have involved the purchase of the 45 strike put for 90 cents, and the sale of the 60 strike put for $4.00. The $3.10 resulting credit might have enticed a trader to express a bullish purview on the stock while taking in premium concurrently. Interestingly, of the 135,000-plus options that traders currently hold in PXP, twice as many belong to the put side as to the calls. Similar activity – albeit using closer-to-the-money strikes – may also have been deployed in the front-month, at strikes 65 and 70.
AMT– Shares in American Tower Corp, the owner and operator of more than 14,000 wireless communication towers on the North American continent, turned in a near-2% decline to $44.80 – still within $2 of its 52-week high – on no apparent news catalyst. The company has drawn positive attention from analysts keen on playing the telecom sector via global infrastructure companies. Still, today’s pullback in the stock price may have induced a trader to protect a long position in the stock with a collar in the October contract, buying the 42-strike puts for $2.00 and selling the 50-strike calls for $1.20 for a net debit of 80 cents. The short call position representing the upper strike of the collar functions not just as a funding mechanism for the put, but also as a covered call of sorts, since the trader is bound to hand over his or her American Tower shares for $50 if the share price penetrates that level by expiration. Curious readers may be interested to know that American Tower has not breached the $50 level since March 2000.
TMX– In another strategic telecom play, it looks like a trader may be using covered calls to protect an underlying long stock position in TelMex, Mexico’s largest fixed-line telecom service provider. American depositary receipts in the company’s stock pulled back .73% to $40.92 after 5 straight days of gains in Mexican trading. The company last week announced the spin-off of its international operations. Today’s quintupling in option trading volume compared to the normal daily level appeared in fresh positioning in the July 45 calls, which were mostly sold for 55 cents apiece. A seller of this position is likely keen to take in premium while agreeing to hand over Telmex shares for $45 each – a $3 premium to the 52-week high – by July 18. The 55-cent price tag on the stock reflects just a 1-in-5 chance of that happening.
CTSH– Volatility-bearish positioning in Cognizant, the provider of IT, consulting and business process outsourcing solutions, has driven total volume to 5 times the normal level. Shares in Cognizant pulled back 2.2% to $34.52 after a Friday session in which it was one of the S&P’s conspicuous gainers. Cognizant is a historically mercurial stock, trading as low as $25.35 and as high as $43.76 over the past 52 weeks, and this flightiness is apparent from a glance at its 56% historic volatility reading. The option market is pricing in about 46% less volatility than the historic record over the next month, probably adding little incentive to near-term volatility sellers as such. With that in mind, it looks like some volatility bears fixed their attentions on the October 35 straddle and its richer time value, selling the at-the-money combination for a combined premium of $7.10 – 20% of the current stock price – in a wager that Cognizant shares will remain right where they are heading into mid-autumn.
PSUN– Shrewd and proactive trade management may be behind the surge in trading volume we observed in PacSun options this morning. This occurred as shares in the skate and surf-inspired teenwear retailer dozed 5% to $9.01, leaving the company just about 17 cents above the 52-week low. The 10,000 lots at the June 10 call line that were bought for 20 cents today may have been the closing purchase of calls shorted back on May 13 for $1.30, just days before PacSun shares staged their biggest loss in 6 years on a downward revision in year-end earnings guidance. The $1.10 per-contract credit on the sale was enough to enter a new long position in September 10 calls for $1.05 and pocket 5 cents per contract besides. The move to buy September 10 calls rather than short them may be indicative of a trader’s belief that the recent punitive selloff in PacSun shares has been overdone, and that the market may have a more circumspect rethink on its prospects when PacSun next reports earnings on August 22 – coinciding, we should add, with that September options contract. Today’s activity sent overall option volume to 5.4 times the normal level.
