Today’s tickers: YHOO, AA, EMC, XLE, USO, GS, WB, C, CROX, LOGI
YHOO– Just one day after news that Yahoo-Microsoft deal may be warmed-over if Yahoo’s sitting board is dumped comes evidence in the option market of an anticipated October resolution to the unresolved takeover. Shares in Yahoo rose 3% today to $24.63 as a mammoth-sized block trade appeared in the October contract. The trade had all the earmarks of a long ratio call spread, with the trader buying 70,000 lots at the October 25 call strike at $2.28 apiece and selling 140,000 lots at the 27.50 call strike for $1.19. In this case the trader took a 10-cent credit on the transaction – selling twice as many out-of-the-money calls to keep trade costs low, even at the expense of upside exposure – and would be looking for shares to trade at least above 25 by October but not to surpass 27.50. This is further reinforced by the fact that the trader apparently sold twice as many 27.50-strike calls as he or she bought 25-strike calls. This would leave half the volume at the 27.50 strike call uncovered, thus leaving the trader vulnerable to hefty upside risk if Yahoo shares blew past $30 and he/she was exercised on the calls. The maximum potential profit for the trader occurs if Yahoo shares close at exactly $27.50 by October’s expiration, in which case the trader stands to pocket some $18.2 million. Interestingly, this is the second large-volume trade in a week to wager on a $27.50 close by mid-October. Last Wednesday, a 61,000-lot short straddle at the October 27.50 strike generated more than $7 in premium for a trader betting on precisely that premise. In any case, the wager doesn’t imply much premium in the event of a new Microsoft offer – and may be betting on only a partial takeover, or no deal at all.
AA– Shares in Alcoa rose .63% to read $33.60 ahead of its after-the-close earnings report, an event which marks the unofficial chow bell of earnings session. Options traders are still pricing in about a $3 move on back of the numbers, but even with call-side premiums sharply lower this afternoon on back of the share price action, the late-session volume favors call positions to puts by 2-to-1. We noticed some indication of call spread activity occurring between the 32.50 and 35 strikes, where a 5,000-lot position was implicated. This could be a last minute contrarian bet on upside share price action for Alcoa shares following the earnings announcement, with a trader buying the 32.50 strike and selling the 35’s.
EMC– News of the departure of VMW founder and CEO Diane Greene and a sharp cutback in its year’s sales guidance had a predictably awful effect on VMWare (whose shares paid a 25% penalty to $40, crashing through the 52 week low, and implied volatility spiraled by a nearly identical percentage rise). But it was downright deleterious for VMWare’s parent company, EMC Corp, where the perceived risk measure rose 28.9% to 51.2% earlier today -a six-month high. Compared to the 30% volatility shown by EMC shares in the past, we can conclude that the news out of VMWare has led option traders to ascribe about 61% additional price risk to EMC Corp shares over the next 30 days, with a pronounced bias to the downside. Even with its earnings report scheduled for July 23 (coinciding with the August options contract), we observed traders sell out of July 15 calls, the value of which have plummeted 86% to just 7 cents today. Fresh put buying at the August 13 and 14 strikes suggest further declines past these newest lows in the aftermath of earnings. Evidence of stability in EMC Corp’s share price surfaced further out in the option calendar, notably in January calls, where calls at strikes 12.50 and 15 were heavily bought on the offer. EMC Corp closed 11.2% lower at $13.44.
XLE– An early-session pullback in crude oil futures and confident forecast by oil investor Boone Pickens that lower demand for oil will bring prices back to the $100 level over the next 2 years led to a degree of froth being blown from the top of the Energy Select Sector SPDR. Shares closed 1.5% lower at $81.54 today and the fact that puts out-trading calls by nearly 3 to 1 speaks to the defensive drift in the market today. One notable trade here involved a 3,200 lot put spread in the July 18 contract, with a trader buying 85 strike puts at $4.05 and concomitantly selling 80 strike puts at $1.40 for a position that first breaks even for the trader at $82.35, but sharply limits any substantial near-term downside.
USO– For further confirmation of the pullback thesis in the options market, we took at look at action in the US Oil Fund. Shares in the fund responded to the paring of oil futures with a 4.4% decline to $109.89. With about 142,000 options in play by day’s end it qualified for our scan of top-50 most active option families with heavy buying in July puts at strikes 104 and 105. If these trades are involved in credit spreads with puts at strikes 107, 110 and 115 (where most of the volume was sold to the bid), it would imply residual firmness in oil prices for the remainder of the July contract, but the overwhelming preponderance of puts traded relative to calls (contracts to sell the fund are outmoving contracts to buy it by a factor of 3.5) tells us that the mood today favors protection against further downside. Just how low will it go? Our option scanners detected heavy, fresh buying in January 80-strike puts, which traded for $4.40 today – that premium requiring a break below $75.60, or 31% below current levels.
GS – Shares in Goldman Sachs – long considered the least dingy of these dogs – reversed early-session losses to pull off a 3% gain at $174.90. With some 132,000 options active, calls and puts showed a relative balance for much of the session. Earlier today we noted heavy activity in Goldman’s August 160 puts, commanding $6.30 per contract – a position that requires Goldman shares to chip away at least another 8% over the next month or so. Option traders currently see about a 1-in-3 chance of that coming to pass.
WB– Fed chairman Ben Bernanke’s promises of a clampdown in subprime and exotic mortgages seemed to stanch some of the bloodletting from the now-anemic shares of Wachovia . Shares rose 13% to $15.70 by day’s end, and with more than 560,500 options trading, Wachovia as among the top volume movers on our platform. Significantly, this has been due mainly to the 44,000-strong volume in July 12.50 puts (exceeding open interest), which has sold off heavily today, after losing more than half its value overnight. Late-session action also showed more than 345,000 lots trading in July 30 puts, volume that may have been tied to stock.
C– Citigroup shares also managed to wring a tiny advance out of Bernanke-speak, up 6% to $7.37. But a look at the 220,000-strong volume this afternoon showed evidence throughout much of the day of option traders looking for Citi shares to fight a losing battle with the $20 threshold for the remainder of the year. Earlier today we observed what looked like a 1,000-lot call spread go through in the September contract between the 12.50 and 20 strikes earlier today, a position that given current premiums would require Citi shares to trade between $16.31 and $20 to be profitable for the buyer, but it should be noted that the 20-strike calls have traded on much heavier volume, and most of this is trading through the bid. December 20-strike puts have mostly been bought.
CROX– Will Crocs finally catch a break…? Shares in the fad clog maker – which have taken a 80% in value this year alone – rose 14% to $7.90 today – coincidental to the fact that Republican presidential candidate John McCain is said to have stumped for Colorado-based Crocs in a campaign speech in Denver yesterday. A writeup of McCain’s speech quoted the presumptive nominee as saying, “Building barriers to Crocs or any American company’s access to foreign markets will have a devastating effect on our economy and jobs, and the prosperity of American families.” So has Crocs achieved the equivalent of a “McCain put?” Implied volatility the shoemaker Crocs rose 15.8% to 125.4% – towering over the 57.4% historic reading in the stock – and what’s more, we observed some 25,000 lots of fresh volume bought on the offer in September 7.00 calls. Crocs reports earnings on July 25.
LOGI– Logitech – Shares in the maker of computer mouse trackballs, game controllers, keyboards and other digital miscellany rose 2% today to $26.65. Earlier today, when Logitech shares were trading sharply lower, we observed an increase in option trading volume to 9.5 times the normal level, appearing in an interesting 3,000-lot put spread in the front month. Here it appeared that a trader sold the upper-strike 30 puts for $4.60 against the purchase of 25-strike puts for 80 cents, taking in a $3.80 credit to wager on the spread between those strikes narrowing over the next week and a half in the event of a rebound for Logitech shares. Implied volatility on all Logitech options reads 51.5% against a historic reading of 38.6%.
