Today’s tickers: XLF, LEH, BUD, CMI, TXN, CHK, KEY, FTO, BQI
LEH– Lehman Brothers’ management made a calculated surgical cut with this morning’s corporate bloodletting of CFO Erin Callan and COO Joseph Gregory. When the news broke before the bell, it was troublingly ambiguous whether the move would be enough to stanch a worsening inundation of volatility and out-of-the-money put activity in Lehman that as late as this morning seemed to point to a potential damaging variant of downside speculation. Lehman shares have since reversed early losses as of this writing, trading 1.4% higher at $24.06, and implied volatility in Lehman options is holding on to a 119% reading – a 50% elevation above the historic reading, well above yesterday’s levels but off from early morning highs. With twice as many puts trading as calls on a hefty volume of 331,000 lots, the positioning remains very defensive, and the out-of-the-money front-month put strikes as low as 17.50 are still attracting volume in excess of 16,000 lots, but much of this is trading on two-way volume and premiums have come off that these strikes.
XLF– Lehman may have been drawn breath of life thanks to a boosted rating on the ailing financial sector by the gang at Morgan Stanley. The move had an immediate and unmistakable impact on shares in the sector ETF, with the XLF recovering 3% to $23.12 having set a fresh 52-week low in yesterday’s session, and given Wednesday’s late-day proclivity to huge volume trades in July 22 puts, we noted similarly large volumes in the opening hours of Thursday at the July 25 call line, most of which appears to have been bought. The volume at this strike accounts for nearly a third of the total volume on the XLF as of this writing. Meanwhile, implied volatility remains extremely elevated, showing a 56% additional risk premium being factored into options as compared to the historic volatility reading on the underlying stock.
BUD– Anheuser-Busch – Yesterday’s confirmation of a $65-per-share bid from InBev for the maker of Budweiser beer will have come as no surprise to option watchers who’ve been monitoring the hopped-up action in June, July, and September 60-strike calls these past few weeks. As implied volatility on all Anheuser-Busch options pulled in nearly 46% on the news, calls are outmoving puts by 2 to 1 on a total volume of some 237,000 lots. The value of the 60-strike more than doubled in value overnight, providing a pretty windfall for traders who opened their tabs back on May 23, when the M&A volume really got started. Option volume at the 65 strike is trading two-way on much more muted volumes, making the likelihood of a higher bid for the Budweiser maker by no means assured.
CMI– Shares in diesel engine maker Cummins advanced 14.5% to $72.26 this morning following news that its rival, Caterpillar, had joined forces with Navistar for the production of over-the-road emissions-compliant engines for trucks and would refrain from selling engines to other truck makers. The deal was seen as an opportunity for Cummins to boost its share on that market. An increase in option trading volume to 3 times the normal level was picked up by our market scanner, occurring as option traders price in 19% additional price risk over the next 30 days than Cummins shares have shown historically. This is a stock that has already appreciated more than 52% over the past year, and while its earnings are not due out until late July, the volume this morning favors positioning in the front month, with June puts active at the 67.50 strike in excess of open interest, in tandem with calls at the 70 and 72.50 strikes.
TXN– Option traders may be taking the tack that good news out of Qualcomm is ipso facto bad news for arch rival Texas Instruments. This morning’s boost in Q3 sales and profit guidance out of Qualcomm thanks to bumper demand for higher-performance phones came days after Texas Instruments affirmed lackluster guidance for the quarter. Immediately after the Qualcomm news, Texas Instruments options showed an abrupt 14.5% spike in implied volatility to 33.5%, making it one of the day’s top implied volatility gainers. This occurred against flattish share price action at $29.78 (Qualcomm shares are sharply higher). With 2.5 puts trading for every call in Texas Instruments, the mood appears to favor defensiveness, with heavy volume at the June 30 put line, and heavy trading on both sides of the July 30 line that may suggest volatility plays going through at that level. Option traders are pricing in 27% additional price risk to Texas Instruments shares over the next 30 days – its options activity in recent weeks has born some of the hallmarks of deal speculation, notably following a Barron’s piece on Texas Instruments’ possible role in consolidation in the analog chip space.
CHK– Shares in Chesapeake Energy Corp declined 3% to $57.81 in early trading. Earlier this week the company’s shares and options gained attention with XTO Energy’s acquisition of Dallas-based Hunt Petroleum, a move devised to give XTO ingress to the so-called Haynesville Shale of Texas and Louisiana. Prior to this acquisition, Chesapeake had been the only other so-called Barnett Shale operator to access the Haynesville Shale. Bullish expectations for the area have helped to drive Chesapeake shares more than 64% higher over the past 52 weeks, triple the performance of the S&P energy index. With nearly 68,000 options trading, Chesapeake is one of the most active tickers on our platform in early market action, and similar strike volumes suggest that traders may be using short collars to protect short positions in the stock. In this case, the trader would have sold the July 55 puts for $1.60 to fund the purchase of 65 calls at $1.35, taking a 25-cent credit even as he or she secures a short position in the stock against an unexpected leg higher past $65.
KEY– Options in KeyCorp were among the day’s most imperiled volatility gainers, after shares in the regional bank slumped 17% to $13.04 on news that it would cut its dividend by half and seek additional capital. The news sent implied volatility on all KeyCorp options nearly 23% higher to 80.5% – towering above the 45% historic reading on the stock – but puts and calls traded at surprising parity, and on volume equal to about a quarter of its open interest. An early rush for put protection at the 12.50 strikes in June and July was counterbalanced by more circumspect positioning in calls after Moody’s moved to affirm its rating and stable outlook on KeyCorp. Call-side volume appeared to suggest long call spreads in June between strikes 15 and 17.50, a move suggesting a wan recovery for shares back to the previous 52-week low.
FTO– Recurrent takeover rumors appear to be guiding the options action in Frontier Oil, whose 24,000 actively traded options are closing in on the equivalent of 1 every 4 of its open contracts in play. These are trading 9 times as often to calls as to puts, consistent with the giddy action of a takeover rumor stock. Shares are up 3% to $27.15 this morning, restoring its price to Monday levels when the share first showed signs of fading on weak U.S. gasoline demand. Today’s activity marked a second-flareup in rumor-driven call buying in Frontier – late last month, heavy call action coincided with record high oil prices on speculation that Frontier might draw a bid from Valero or Suncor. Today we’re seeing a degree of cynical even-handedness play out in two-way traffic in June 30 calls, trading to buyers and sellers on a 10-cent spread. July calls at the 30 and 40 strikes have attracted buyers, however, even as option traders ascribed just a 7% chance of Frontier breaking past $40 over the next month. As for the provenance of these persistent rumors in Frontier Oil, scuttle has it that Frontier could be a preferred takeover target for a company looking to boost its capacity for refining heavy bituminous “Canadian sands oil,” which has traditionally been costly to extract but potentially more rewarding given the recent bullish price action in crude.
BQI– Apropos of that, unusual action carried over to another “Canadian oil sands” ticker Oilsands Quest, which explores and develops oil shale in Saskatchewan, where many of these heavy reserves are located, and develops petrochemical derivatives used for feedstock. Shares rose 1% to $4.72 in by early afternoon, but it was a quadrupling in option trading against the normal daily level that nabbed our attention – especially as it appeared centered in calls predicting a return to mid-2006 price levels for Oilsands Quest. The October 7.50 calls, nearly $3 out of the money, traded to the middle of the market for 30 cents per contract, on volume equal to more than half the open interest. While this may represent a closing purchase or covered call written against a long position in the stock, it’s worth noting the pronounced elevation in implied volatility – at nearly 58% it shows option traders pricing in a quarter more likelihood for volatile price movement than shares have shown historically. The fact that option traders hold 5 times as many call positions as puts suggests many traders are confident that this risk lies to the upside.
