Today’s tickers: CTXS, ICO, BJ, XHB, DTV, SGMS, NRG, AET, WFC
CTXS– In a week that has brought a fairly relentless drumbeat of bad news from tech stocks, Citrix shares are down 2% at $27.23 ahead of its own after-the-bell earnings. Oddly enough, however, option traders have sent call volume to a three-month high in Citrix, with heavy buying in August 30, 35 and 40 calls on volumes well in excess of open interest. Buying pressure in calls extended through September and into the December contract at the 35 strike – a position which, factoring in the 90-cent premium on the contract, requires a 31% advance from current levels to break even. While the options activity is what you’d expect from a stock trading on some kind of bullish rumor – it is unusual that the scuttle hasn’t budged the stock price any higher. Implied volatility at 57.5% compares to a historic reading of 42.8% on Citrix stock.
ICO– One day after we reported an unusual ratio put backspread in Peabody Energy that would seem to indicate a precipitous fall for coal later in the autumn. Today the pullback in coal stocks continued today with quirky options activity apace. Shares in International Coal Group, which is due to report earnings today after the bell, are down 4.4% at $48.96 as our option scanners pick up a 7-fold increase in option trading volume. Today it appears that option traders are eschewing the front month contract which is under sway of earnings report and the current sector-wide down-drift and looking to lock in upside call positions at the September 10 strike for 80 cents apiece – options traders pricing in a 44% probability of that strike landing profitably by September 19 – and even further afield in the December 15 calls at 40 cents apiece. The delta on that position indicates a 21% chance that International Coal Group shares can make the 66% upward trek to $15 by mid-December – a climb that would certainly be hastened by continued consolidation in the space that might see ICO as a attractive target.
BJ– Costco’s profit warning earlier today showed the discount retailer left with the short end of the wishbone, having kept prices low on a bet that bargain-hungry shoppers would boost traffic at its store locations but finding that energy prices were causing shoppers to sharply economize store trips. The surprise move sent Costco shares down 10.7% and implied volatility on its options more than 24% higher on the session. Option traders turned shrewdly to volatility plays in its sector peer BJ’s Wholesale Club, whose shares lost 10.5% to $36.56 today. The Costco news sent implied volatility in BJ’s Wholesale Club options 12% higher to 51.5%, making it one of the day’s top implied volatility gainers. Options are trading at 5 times the normal level, adding up to the equivalent of nearly half of its open interest, concentrated mainly at the August 35 line, where we’re seeing what looks like buyers as well as sellers of this straddle, priced to reflect about 15% of BJ’s share price ($5.75) in the balance between now and August 15. Traders who think that’s overpriced are likely selling this position, while those who believe that there’s more choppiness to come in the weeks before its own August 20 numbers (or even a profit warning of its own) are buying into it. Option traders only hold about 19,000 total positions in BJ’s Wholesale Club, with more than twice the number of puts as calls.
XHB– President Bush announced earlier today a decision to rescind his opposition to a homeowners bill that would help struggling owners refinance their mortgages as well as extend authority to congress to infuse cash into Fannie Mae and Freddie Mac. The news appears to be behind the 5% gain we’re seeing in the value of the SPDR Homebuilders’ ETF, which reads $18.76 at present dispatch. Option traders, however, have put about 3 times as many puts in play as calls, with what looks like put spread activity going through between strikes 15 and 18 in the August contract, and again at the 11 and 12 strikes.
DTV – Shares in DirectTV are trading .83% higher at $26.70, but our interests were grabbed by a 10,000-lot put spread that spears to have gone through between strikes 20 and 25 in the January ’10 contract. The volume represented 9 times the normal level of interest that option traders normally show in DirectTV. Both ends of the spread traded to the middle of the market, so we can’t confirm the directionality of the activity here. A long player would be looking for restrained downside in Direct TV shares over the next 18 months, paying a $1.96 credit for a transaction that doesn’t begin generating profit for the buyer until Direct TV shares drop another 12% from current levels. A short player would take that $1.96 spread as a credit, wagering on shares remaining above the 25 level into 2010. DirectTV shares have in fact traded as high as $29.10 over the past 52 weeks.
SGMS– Unusual options activity this morning in a quirky stock – Scientific Games Corp, the maker of lottery systems and scratch-off tickers, which is due to report earnings on July 31. An increase in option trading volume to 18 times the normal daily average brought about the highest level of call trading activity in at least 52 weeks as shares read 1% higher at $30.53. Here it looks like a trader took a fresh 2,000-lot long position in August 30 calls for $2.30, but chose to limit his trade costs, reining in the break-even point on the trade by funding it with the sale of 2,000 lots at the October 40 call strike. Scientific Games is due to report earnings on August 1.
NRG– NRG Energy – A 4.6% drop for shares to $36.02 concurred with an increase in option trading volume to 2.3 times the normal level. This appeared in a 1-by-2 call spread, which may have involved the trader selling 10,000 lots of August 40-strike calls for 77 cents apiece, and buying 5,000 of the 37.50 calls for 1.83 apiece. The trader in this case is limiting his initial trade costs to just 29 cents apiece and playing against a break of $40 for NRG, the cost having consistently traded below that level since July 9. NRG shares have averaged $41.07 over the past 6 months. Implied volatility at 45.6% is elevated against the 30.7% historic reading on the stock.
AET– Aetna shares rallied 6.3% to $38.44 following Wellpoint’s earnings report and well ahead of its own July 31 release. Option volume stands at 7 times the normal level right now due to heavy buying and selling at more than twice the open interest at the August 40 call line.
WFC– Shares are 2% higher at $31.03 at present, but it looks like option traders are playing the other side of this one, scooping up put positions given that implied volatility has come off by one-third in the past two weeks. Put volume has picked up mightily this afternoon, outpacing calls by 2-to-1 on a sum volume of more than 300,000 lots. In addition to heavy front-month interest at strikes 25 and 30 (where the positioning is fresh), we saw what appeared to be heavy buying interest in 32.50-strike puts at $3.70 apiece, and long put spreads between strikes 22.50 and 27.50 – this position comes with a 95-cent net debit for the long player, which means the trade performs best if shares decline at least below $26.55 (14% off current levels) but not below $22.50.
