Today’s tickers: BSX, WPI, SGP, MRK, AZN, AMGN, CELG, BBH, BAC, KRE, XLF
BSX– Implied volatility in the maker of “less invasive” medical instruments, Boston Scientific Corp, is elevated at 45.4% (compared to 33.8% historic) ahead of its after-the-bell earnings report as shares trade flat at $13.84. An increase in options trading volume to nearly 8 times the normal level shows traders eschewing the front month, however, and entering 10,000 lot positions in November 15 calls for 90 cents, and again at what looks like the January 10/17.50 collar or strangle. If the January volume was a strangle, it would have been a short position favoring rangebound activity between the strike prices with a 75-cent credit hanging in the balance. A collar at these strikes given the order flow would also have been short, with a trader selling the 10-strike puts and buying the 17.50-strike calls to protect a short position in the stock. Boston Scientific shares are up 19.6% for the year to date.
WPI– Last week’s much-ballyhooed buyout of Barr Pharmaceuticals by Israeli sector peer Teva, and this morning’s offer by Roche to acquire the remaining stake in Genentech has option traders looking for the next possible takeout target. To that end we’re look at options activity in Watson Pharmaceuticals, which we should be careful to stipulate has no specific rumor tied to its stock, but where some option traders showed an unusual interest in out-of-the-money calls today. With shares down 2.5% to $29.13 we registered an increase in option trading volume to nearly 10 times the normal level, situated in November 35-strike calls, which were bought for 40 cents. Given that Watson shares have traded as low as $23.90 and as high as $33.58 over the past 52 weeks, a buyer of this strike is looking for a 5% premium to the 52-week high by November 21. This seems unusually precise timing for upside of that magnitude – especially given today’s share price action. Implied volatility at 34.6% is elevated above the 23.6% historic reading, but this gauge of potential share price turbulence has risen steadily (some 44% in fact) since mid-June. Today’s activity in the strangely suspicious out-of-the-money call strike brought overall call volume in Watson Pharmaceuticals to a 3-month high.
SGP– Schering-Plough – Shares are down 14.3% to $18.40 after news that its drug Vytorin, which is co-marketed with Merck, had failed to meet its primary clinical goals and apparently carried a slightly higher risk of cancer. Schering-Plough and Merck both postponed their earnings announcements until after the bell pending the Vytorin update. While implied volatility in Schering-Plough options remains very high at 62% (against 36.5% historic, and far higher than the reading in Merck), option contracts are moving at more than 21 times the normal level at present report with a slight edge to calls. Excessive volume at the 20 strike has been mostly bought, while the 22.50 strike calls have traded to mostly to sellers. The preponderance of fresh longs at the 15 and 17.50 strike puts suggests that other traders may be positioning long of volatility via strangles, or simply bracing for more downside.
MRK– As we indicated above, despite Merck’s involvement in the Vytorin saga and its similar move to postpone quarterly earnings until after the bell, both the downside and the implied volatility setup is far more subdued in Merck as compared to Schering-Plough. Shares are down 6.7% at present at $35.12, and implied volatility on all of its options ticks in at 37.2% – that’s about a 12% gain from the close on Friday, but still well below the extreme gains we’re seeing in Schering-Plough this morning. Front-month options suggest about a $3 move for Merck shares between now and August 15, which we can reasonably interpret to mean an 8% move on back of the earnings. The action here appears more resolutely contrarian given the share price action, with virtually all of the open interest in August 37.50 calls being actively deployed today and trading mostly to buyers. Volume at the 32.50 and 35 put strikes is selling mainly to the bid.
AZN– Options on the American depositary receipts of global pharma giant AstraZeneca picked up to 4 times the normal level after analysts at J.P. Morgan offered bullish prospects for its July 31 earnings report, forecasting positive benefits from foreign exchange, an ongoing corporate restructuring, and positive sales guidance. With shares up 1.3% to $45.84, the activity appeared to spur new positioning in August 45 calls at $1.85 apiece, which require a break of at least $46.85 to prove profitable for the trader.
AMGN– Shares in Amgen are up 1.3% to $53.28 in late-day trading. The ticker qualified for our scan of top-50 option movers by volume due to what may have been a trader deploying a diagonal calendar put spread, selling 15,000 puts at the September 52.50 strike for $2.12 and buying October 45 puts for 85 cents. The trader in this case is taking advantage of relatively higher implied volatility in the September contract, which he or she expects to decay in value more rapidly than the October 45 put. Amgen shares are up 25% since June 12. Implied volatility at 35% compares to a historic reading of 23.5% on the underlying stock.
CELG– – Celgene – which is due to report earnings on Thursday – likewise ranked among the top-50 movers by volume early in the session on Monday. Shares rose 1.2% to $71.73 as we noticed what looked like a 3,000-lot credit spread trade in the August contract between strikes 60 and 70. In this instance, the trader sold the 70-strike puts for $2.20 and bought the lower-strike puts for 45 cents, taking a $1.75 credit and hedging the short put position to boot. The trader in this case is hopeful that both positions will expire worthless by August 15, which they’ll do by remaining well above the $70 strike through Celgene’s earnings report later this week. This credit may also have been used to fund the purchase of September 80-strike calls for $1.40, although we have not confirmed the order flow of those September calls. Celgene shares are up 55.7% for the year to date.
BBH– Shares in the Biotech HOLDRs Trust, a closed-end fund whose components include the likes of Gilead (a big options mover on Friday) are up 6.3% today at $190. The increase in option trading volume we’re observing to nearly 5 times the normal level shows a fairly even balance between puts and calls, but notable trades include what may be call spread activity in the October contract between strikes 180 and 195.
BAC– Shares are up 4% to $28.56 and with earnings now out of the way, anxieties in the options market have been quelled enough to allow implied volatility to shrink back about 31%. Puts are trading with a slight privilege over calls by a factor of 1.2, as front-month positions at the 30 strike and below have been depleted of 70-80% of their value due to the spike higher for shares. Call-side premiums up about 200% at the 30 strike and above, and we’re seeing heavy volume at these strikes as well.
KRE– KBW Regional Banking ETF – Shares are down .80% to $28.47, and with more than 124,000 options trading, the regional banking ETF is one of the absolute top movers of the day –even trading at 19.5 times its own daily average. The heavy volume in ratio put spreads between strikes 22.50 and 25 in the September contract may relate to heavy volume at these very same strikes that went through on Friday – i.e., traders may have closed out these positions on back of the less-pessimistic numbers from super-regional Bank of America.
