Today’s tickers: KRE, MSFT, BAC, MIR, OSTK, GILD, BRL, MAT
KRE– We spent much of the afternoon puzzling over a sizable 2-by-1 put spread in the KBW Regional Banking ETF, which closed the afternoon 1.3% higher at $28.70. We discovered that this extremely large-size 2-by-1 put spread involved 80,000 lots in the September 22.50 put bought 90 cents, and 40,000 lots sold at the 25 strike for $1.80, breaking even on the entire trade without a credit or a debit at the outset. Generally a trade in which the lower strike is bought and the higher strike sold is a bullish strategy initiated at a net credit, in which the trader plays on the spread narrowing and both puts expiring on a rise in the stock. In this case, the trader is doubling-up on downside protection in the event of a large blowout move below the 52-week low of $21.72 and hedging the higher short position if shares remain below the $25 line by mid-September.
MSFT– Heading into Microsoft’s earnings yesterday, we were mindful that long volatility positions hadn’t paid off particularly well for Microsoft traders. While January options had priced in nearly an 8% move, the actual move fell short of 1%. Again in April we saw option traders looking for a 6.6% move and only got about 5.9%. Traders were pricing in about a 5% move heading into the numbers this week and the implied volatility reading on all Microsoft options actually fell below the historic reading on the stock prior to the report – a very unusual setup ahead of earnings. So with today’s 7.7% decline to $25.40 it’s clear that it paid to go against the grain and long of volatility – and that downside disparity in implied volatility, coupled with the low time value of the July options ahead of the release – likely made it cheap for contrarian bets. Today’s heaviest volume is in July 25 and 36-strike calls, which have lost about 98% of their value overnight Earnings misses by Microsoft and its search-rival and Nasdaq cohort Google sent Nasdaq Volatility as reflected in the VXN 2% higher at 30.49.
BAC– Meanwhile, the earnings caravan marches on with Bank of America due out before the bell on Monday. Bank of America shares gained 3.3% to $27.37, further rewarding holders of July 25 and 27.50 strike calls, whose values rose more than a third on their final day on the board. August options, which trade from Monday, are pricing in about a $4.82 (17%) move up to August 15, which speaks to a large potential move on back of the numbers Friday. Calls at the 27.50 and 30 strikes are trading heavily in that month.
MIR– Option volume in Mirant, the power company whose shares are down 18% in the past month rose to 6 times the normal level due to some unusual call spread positioning in the September contract. It looks like a trader may have gone long the September 35/37.50 call spread in a 16,000 lot position that would have created a net debit of 80 cents. Additional volume in December 40 calls traded to the middle of the market at $1.80 – Mirant last having traded at that level in late June. Implied volatility at 57.4% represents more than twice the historic reading on Mirant stock – an unusually high elevation for a company not due to report earnings until August 8. This rise in implied vol has culminated quietly since late June. Mirant Shares closed .95% lower at $33.28.
OSTK– Despite an earnings announcement in which it managed to trim its second-quarter loss in half, implied volatility in Overstock.com actually rose 16% today to 113.5%, ranking the company among the top volatility gainers as shares lost more than 40% of their value to read $16.42. Option volume appears fairly sporadic, but still came in at 9.5 times the normal level with a slight skew to puts at strikes as low as 15 in the August contract, where premiums rose 714% to $2.85 today.
GILD– Shares in Gilead Sciences dropped 10.4% to $49.64 after the producer of drugs to treat viral diseases guided larger-than-expected costs for 2008. The company was also downgraded by a number of analysts. Options traded at 7.7 times the normal level, as we saw evidence of traders positioning for what analysts at Oppenheimer called “short-term disappointment” in its share price action. They appeared to be doing this via August put spreads between strikes 50 and 55, a position that comes with a net debit of $3.25 for the long buyer that first breaks even at $51.75 – implying little confidence in a near term recovery. Fresh volume is showing up in July 50 calls, which expire today and have lost 73% of their value overnight. August calls in the 50-60 strike range appear to be selling mostly the bid. Implied volatility on all Gilead options has shrunk back more than 17% today but at 31% still shows an elevation above the 28.7% historic reading – suggesting continued likelihood for greater share price movement over the next 30 days than these shares have shown historically.
BRL– Seems there was something to the talk of a Teva bid for Barr Pharmaceuticals after all. On Wednesday, we observed a spike in implied volatility coupled with giddy call buying in Barr that appeared consistent with a stock moving on takeover rumors. An article appearing on an Israeli business website named Teva Pharmaceuticals as the buyer, and today a deal was announced valuing Barr shares at $66.50 apiece. Barr shares ended the day 11.2% higher at $63.60 on the news, as options traded at 9 times the normal level, trading to calls more than 4 times as often as puts. Heaviest demand was for the August 60 calls, which were up 89% in value to $4.90 today.
BRL– Option implied volatility in Barr Pharmaceuticals rose nearly 27% to 55% by day’s end as its option trading activity quickly picked up to some 12 times the normal level. The massive disparity between its implied volatility reading and the 27.4% degree of deviation that Barr Pharmaceuticals shares have already documented suggests option traders pricing in twice the potential price risk over the next 30 days, heading into its earnings report on August 7 – an astonishing level so far in advance of earnings. With calls outmoving puts by more than 7 to 1 as shares read 2.3% higher at $47.15, the option here appears to favor the upside, with heavy action in August calls at strikes 45, 50 and 55.
MAT– Another on-target call by option traders was today’s court ruling in favor of Mattel in its copyright infringement suit against the maker of Bratz dolls. The sanguine mood was further reinforced by better-than-expected quarterly earnings thanks to its film merchandising business. Mattel options moved at 3.5 times the normal level today as shares advanced 11.3% to $20.34. Most of this activity was in front-month 20-strike calls, trading at 25 cents apiece, with not much action in subsequent months. Implied volatility remained elevated for much of the day at 41% against 37.3%, although it’s come off 17.8% from yesterday.
