Today’s tickers: LEH, MER, XLF, SWY, VPHM, NUE, CIEN, MAR, CTSH
LEH– Lehman shares perked up 5% to $33.09, as reports that its trading revenues have been dented by counterparty concerns appeared to be offset by a Wall Street Journal that the brokerage is willing to open its books to domestic and foreign institutional investors in hopes of attracting direct investment. The fact that implied volatility at 95% – while still handsomely elevated above the 67% historic reading – has come in from yesterday’s 110% levels points to a degree of confidence that even if Lehman shares face near-term downside, the activity is not consistent with the kind of grievous, death-speculation observed in Bear Stearns just two months ago. Early volume showed traders willing to take off positions in June puts at the 25 strike on volume equal to about a third of the 30,000-strong open interest, while the 30 strike traded to buyers and sellers. Open interest still shows twice as many put positions open as calls in Lehman, consistent with a prudent posture of caution ahead of its earnings later this month.
MER – While Merrill Lynch shares pulled back .39% to $40.60, option prices are reflecting about 26% more price risk to the brokerage’s shares over the next 30 days. That said, option traders have settled on the traditionally volatility-rich October contract to wager their price bets. Conspicuous volume appeared in a 10,000-lot put spread between the 40 and 45 strikes, both trading to the middle of the market. A long position here would involve the trader taking on a $2.51 debit in anticipation of price action in the $40-42.49 price range heading into October, while in a short position, the trader would pocket the $2.51 spread as the maximum profit in hopes that the spread will narrow and both strikes expire unexercised.
XLF– Shares in the financial sector ETF shrugged off yesterday’s augured Moody’s downgrade of bond insurers MBIA and Ambac (something that would have devastated the market big time just a couple of months ago), with a 1.2% gain to $24.45. With 375,000 options trading in the first 90 minutes of the market, the XLF is the most trafficked ticker on our platform, with puts outmoving calls by more than 3 to 1. Earlier today we noted a tendency among traders to sell heavily out of June puts at the 25, 26 and 27 strikes, while entering long positions in September puts in anticipation of a possible early autumn revanche for financial sector volatility. Relevant put strikes active in this regard are the 24, 25 and 26 lines, where nearly half the active XLF volume today is situated.
SWY– Shares in Safeway are trading 1.6% higher at $32.42 on no apparent news catalyst. What grabbed our attention was an increase in its option trading volume to 7 times the normal level that – while it incorporated puts as part of a trader’s strategy – did not indicate bearish action for the supermarket franchise. It appears that a trader entered 2 credit spreads using 3,333 puts at the 25/30 spreads in each of the June and July contracts. Taking a 15-cent credit on the June play , and a 50-cent credit on the July strategy, the trader is looking for the spread in each month to contract as close to zero as possible, allowing him or her to keep the initial premium as profit gained if Safeway shares rise in value.
VPHM– Shares in Viropharma, the maker of antiviral drugs including Camvia for organ transplant patients, are trading 4% higher to $10.78 following news that the company will use a July 23 meeting of the FDA’s advisory committee to put forward its arguments on using clinical and biopharmaceutical expert data in evaluating bioequivalence methods for gastroenterology drugs. The news is relevant to ViroPharma’s Vancocin drug, a brand it acquired from Eli Lilly in 2004. We believe this explains not just the 26% spike in implied volatility to 47.4% – making it one of the day’s top volatility gainers – but also the preponderance of call buying at the August 12.50 strike, positioned for that regulatory hearing on July 23. ViroPharma shares have traded as high as $15 over the past 52 weeks.
NUE – Shares in Nucor Steel, the country’s largest recycler of ferrous and nonferrous scrap as well as a major steel producer, staged an impressive 8.4% advance to $80.39 on Thursday, having raised its year-end profit guidance thanks to bullish international demand for its steel bar, beam, sheet, and plate products. Early in the session, Nucor Steel put in an appearance on our scan of most active option tickers owing to fresh buying activity in June 80 calls. While this strike is nominally at-the-money, the $3 price tag today implies a test of Nucor’s 52-week high of $83.56 over the next weeks. Current option premiums suggest a 1-in-4 chance of Nucor moving even higher, to the $85 level, by that time.
CIEN– Shares in Ciena, the maker of telecom network software and platforms, are showing a 7% pullback to $28.34 despite unmasking Q2 profit and revenue figures that beat street estimates. Early session volume of some 18,000 lots was twice the normal level observed in Ciena, and the fact that implied volatility at 46.5% remains elevated by a factor of one-fifth above the historic reading on Ciena shares suggests the market is still chewing its cud as regards a fair settling price for the share. Early volume showed heavy volume in June calls at the 30 and 35 strike, with long interest in the 35’s extending into the July contract.
MAR– You rang…? Following as if on cue from yesterday’s takeover-rumor-type activity in Starwood Hotels and Resorts, options in franchise hotelier Marriott are trading at 10 times the normal level (matching up to 1 out of every 5 Marriott options outstanding) against a meager, .45% gain for shares to $31.27. An early session spike in implied volatility to 41.7% – dwarfing the historic reading by nearly a quarter – suggests that takeover rumors, however unquantifiable, are moving this stock as well today. With calls outmoving puts by 25 to 1, the action shows heavy buying in June calls at the 32.50 and 35 strikes, extending as high as the 37.50 strike in the July series. Marriott shares are trading within about 20 cents of their 52-week low, having reached as high as $48.28 over the past 52 weeks.
CTSH– Just days after observing at-the-money straddle-selling in the historically mercurial Cognizant, this morning’s 5-fold increase in option trading shows still more volatility-bearish positioning in the October contract. Traders appear to be writing the 35/40 strangle combination, taking in $5.10 in premium in the expectation that Cognizant shares will remain hemmed in the range of the strike prices heading into the autumn. As we noted earlier this week, Cognizant has traded as low as $23.37, and as high as $44.44 over the past 52 weeks. Today its shares are 2.5% higher at $36.39.
