Today’s tickers: BTU, CNC, QCOM, MRK, SNDK, TXN, TAP, GTXI, SPF, BRCD, XLF
BTU– Shares in the world’s largest privately held coal company, Peabody Energy, are down 6.7% at $64.58 as we report this afternoon on an unusually large ratio put backspread that appears to have gone through in the September contract on no news catalyst. This 2-by-1 spread showed a trader buying 20,000 of the September 55 puts at $2.90 and selling 10,000 of the 65’s at $7.00, taking a $1.20 credit on a transaction that allows the trader to double-up on downside protection at no initial cash outlay but doesn’t generate profit before a move to $46.20 (28% off current levels): lots of protection here for a big move that doesn’t appear to be correlated with Peabody’s earnings announcement tomorrow.
QCOM– Yesterday’s loud earnings miss at Texas Instruments sent a shudder through the shares and options of arch-rival Qualcomm, which is due to report tomorrow. Shares are down 4.5% at $43.27 as implied volatility ticks in at 47.5% – up about 9% from yesterday and a full 30% premium to the historic volatility reading. Having been caught wrong-footed by a number of larger-than-usual earnings moves out of the tech space in recent days, it appears that option traders are taking no chances on a large potential move out of Qualcomm – and indeed, front-month options are pricing in as much as a 10% move between now and August 15. We are also seeing traders accumulate long positions at in August puts as low as 35, where more than 3,500 lots have traded today where open interest numbered only about 805 lots prior to today.
EWC– Options on the iShares MSCI Canada fund ticked our market scan of relative volume gainers with a boost in activity to more than 36 times the normal level. Shares in the closed-end fund, which is indexed to a basket of Canadian stocks heavily weighted in the financial and commodity spaces, are 1.7% lower at $31.59 at present reading. Today’s action appears in a 2,500-lot strangle at the December 30/32 strikes, which appears to have sold to the bid for a pretty $3.30 premium (10% of the current share price). The trader in this case is looking for shares to remain at or around current levels by year’s end – in the past 6 months, the Canadian market ETF has traded as low as $28.36 and as high as $35.75.
CTC – Shares in managed-care provider Centene gained more than 16% to $19.75 after reporting better-than-expected Q2 numbers and – critically – left its guidance intact. Centene options activity was noteworthy to us due to an increase in volume to more than 12 times the normal level, with option traders putting a possible cap on the near-term upside at the August 20 call line. These contracts sold mostly to the bid, well in excess of open interest, as the value of this position rose 533% on back of the numbers. The activity here was enough to represent the single-biggest call volume in Centene in at least 52 weeks. Option traders have accumulated loads of defensive put positions in Centene throughout the month of July – where open interest at the first of the month was more or less split evenly between calls and puts, the company’s modest, 12,250 open interest is currently made up of twice as many puts as calls.
MRK– Yesterday’s move by Merck and Schering-Plough to postpone their earnings releases pending the release of some very discouraging clinical data on storied cholesterol drug Vytorin led investors to chasten the latter drug company much more virulently than the former. This puzzled us for much of the day yesterday, but it seems the downside quickly caught up with Merck after the company withheld its year-end earnings guidance and trimmed projected sales for two of its core drugs, Gardasil and Singulair. The news led to a smattering of analyst downgrades, and with that in mind we see Merck shares down 10.3% to $31.68 – crashing below the 52-week low and rewarding traders who were long of volatility heading into the earnings report (August options were pricing in about a $8 move on back of the numbers as of yesterday, so we can see with benefit of hindsight that long straddles and strangles were a relative bargain). The question on option traders’ lips this morning appears to be whether a move below $30 is overdone for Merck, and that drama has played out at the August 30 put line more than 26,500 times today. While relatively more of these August positions have sold to the bid, we noted fresh buying interest one month ahead at the September 30 put line, where more than 7,700 lots have traded today at $1.20 apiece – a position that requires another 8% more downside between now and September 19. Option traders currently see a slightly better than 1-in-3 chance of that happening.
SNDK– Speaking of orgiastic selloffs, shares in Sandisk lost nearly a quarter of their value today to read $13.70 after an earnings thunderclap that brought with it a torrential drop in sales revenues and a 10% rise in cost of product revenue, hardly helped by what the company’s CEO called a “rapid deterioration in consumer confidence.” Citigroup, which has been vocally bearish on Sandisk since at least mid-June due to anticipated “demand erosion,” immediately cut their rating on Sandisk shares to “sell” and said in a note to clients that they were “throwing in the towel” on its shares for the duration of 2008. Implied volatility on all Sandisk options has come off about 12% since yesterday but at 69.9% remains stubbornly elevated above the 60.9% historic reading on Sandisk stock. This suggests that a heightened risk premium to Sandisk price levels is still being factored into its option premiums. We see brisk two-way traffic in excess of open interest at the August 12.50 and 15 call strikes, but also heavy buying pressure at higher premiums and ballooning implied volatility on the put side at strikes 10, 12.50 and 15.
TXN– Earnings doldrums extended to chipmaker Texas Instruments, which offered slightly softer-than-expected Q2 numbers but killjoy guidance for Q3 – and that was the rub for traders, who sent shares down 18% to $23.40 today. The options market was so taken aback by the miss that implied volatility on its options actually rose 14.5% this morning – after the numbers were out. This reading has since come off a bit but at 40.6% shows a slight risk of yet more turbulence being priced into the coming month (the historic volatility reading on Texas Instruments shares is 38.2%). August volume shows calls and puts at the 22.50 and 25 strikes trading with a fairly even split to buyers and sellers well in excess of open interest at all strikes – suggesting that traders aren’t just closing out pre-earnings volatility positions but playing speculatively on the likelihood of near-term stabilization in Texas Instruments’ price. Buyers appear keen to accumulate fresh longs in September 22.50 puts, however, suggesting further erosion into the fall, in line with Texas Instruments’ dour forecast.
TAP– Many market observers have speculated in recent weeks that the digestion of the Anheuser-Busch/InBev deal will create a short-term opportunity for Molson-Coors and its joint venture with SABMiller. But the distraction may not last long, and in the longer term, some say Anheuser Busch-InBev is likely to represent incredible cost pressure to Molson Coors in an environment of already high-and-rising oil and hops prices for beer producers. With that in mind, shares in Molson-Coors are up .71% to $56.43 today as we observe a boost in options trading volume to 4.7 times the normal level. This appeared what looks like a short October call spread between strikes 60 and 65 involving 3,600 lots. The trader in this instance sold the lower-strike, closer-to-the-money call for $2.80 and bought the 65-strike call for $1.35, taking a credit of $1.45 on a wager that Molson-Coors shares will remain below $60 by October 17.
GTXI– Shares in GTx Inc., a Tennessee-based biotech company that develops molecules that strategically modulate the effects of estrogens and androgens connected with cancer and osteoporosis, are up 4% at $18.31 today on no apparent news catalyst. An increase in options trading volume to 7.3 times the normal level appeared in the form of a trader buying a 3,500 lot position in August 17.50 calls for $1.25, and possibly defraying part of this transaction by writing 3,500 lots at the September 15 puts strike for 40 cents. The takeaway here is that the trader isn’t expecting a drop below 15 in connection with GTX Inc’s August 5 earnings report.
SPF– Standard-Pacific Corp – For a second consecutive session we’re seeing heightened option trading interest in Standard Pacific, as shares trade flat at $4.14. An early increase in option trading volume to 32 times the normal level appeared first in the form of pair of fresh put spreads at the 7.50 and 10 strikes in the August and September contracts involving about 2,390 contracts at each strike, but the volume has since expanded to show far higher volumes at the deep-in-the-money 10 strike. Implied volatility at 106.3% shows a dramatic elevation above the 83.2% historic reading on Standard-Pacific stock.
BRCD– – Brocade Communications – Shares dropped 20% to $6.66 on news of its takeover bid of Foundry Networks – a move that analysts have tipped as a bid to take on Cisco in the network equipment space. The move was accompanied by a healthy 37.5% spike in implied volatility, as traders looked to 6.0-strike puts in the October and particularly the January contracts, driving overall volume to about 2 times the normal level.
XLF– Finally, a check on the always-liquid Financial Select Sector SPDR. Shares reversed early gains on back of Wachovia earnings and now read 1.2% higher at $20.99, holding ground firmly above that $20 threshold. Since our first early morning check of the markets, we’ve seen some mammoth volumes go through in August calls at the 17, 19 and 21 strikes, with the 19 and 21 strikes appearing to sell to the bid on volume in blocks of 48,000 lots and 162,000 lots respectively. We have no read as yet as to whether this volume was traded together. Implied volatility in the XLF continues to sink, however, at 48.6% it remains below the 51.86% historic reading on XLF stock, which speaks to some measure of fear resolution at least inasmuch as the depositary institutions are concerned. And at least one trader banked on that with a good old-fashioned 5,000-lot call spread in the January contract between strikes 20 and 25, paying a $1.84 debit on a bet that XLF shares will trade within a $3.16 range above current levels heading into the New Year.
