Today’s tickers: VIX, RTH, PZZA, EGN, MER, C, CSC, TIE, PWAV, GPS, ALXN, ELNK
VIX, – Market bulls took consolation in today’s pullback in oil prices, a marginal rise in July consumer confidence that ended a six-month decline, and a sense of clarity (however dour) in Merrill Lynch’s decision to sell $30 billion in asset-backed securities at a significant writedown. All of the above had a soothing effect on composite implied volatility in the S&P as measured by the CBOE Volatility Index, which closed 9% lower at 22.03. We often monitor VIX options activity on sharp pullbacks to see if option traders have availed themselves of the downward move to buy cheaply into volatility-bullish positions that might warn of a new try higher in the VIX. It bears repeating here that one full year into the credit crunch, VIX tests of 30 have been few and fleeting, but the 30-line remains a useful demarcator of anticipated flares in volatility and call volume at that strike indicates traders’ willingness to seek protection against new rounds of S&P volatility. A number of trades today in the September and October VIX contracts suggested that the current lull in the VIX may not be long for this market. One trader appeared to use a long call spread between strikes 25 and 30 in the September at a net debit of $1.05 to position for a pull at least above 26.05 (14% up from current levels) but not to exceed 30 by September 16. Another trader used a volatility-bullish position on the volatility index with a 1,000-lot strangle in October between strikes 25 and 27.50 – the combined premium on this position covering the buyer in the event of a break above 31.85 or below 20.65.
RTH– Shares in most major retailers are ticking in sharply higher on back of the consumer confidence numbers this morning, along with the Retail Holdrs Trust, a closed-end fund whose components include the likes of Wal-Mart, Costco, Home Depot and Amazon.com. Shares closed 3.6% higher at $89.05, but some intriguing volumes have catapulted overall option trading activity to among the top-50 volume movers today. Calls at the September 95 strike have traded on volume of nearly 11,000 lots – about triple the open interest – to the middle of the market at $1.50 apiece. As this price reflects only about a 1-in-4 chance of the share price making that 7% climb by September 19, we wonder if the trader was selling the call to take in the premium and bet against a move of that magnitude. We also noticed put ratio backspread activity in the January contract between strikes 85 and 90, with the trader buying 4,000 lots at the lower strike at $5.70 apiece, and selling 2,000 lots at the 90 strike for $7.80 – a trade that performs best if the Retail Holdrs Trust makes a significant move to the downside after the holiday shopping season.
PZZA– With much of the rest of the restaurant sector in disarray (witness today’s bankruptcy filing by Bennigan’s), ultra-casual Papa John’s Pizza has been one of a handful of success stories in the space. With shares up more than 27% for the year to date, the pizzeria has handily outperformed both the S&P 600 smallcap index (of which it is a component) and its even smaller subset of consumer discretionary stocks. With shares up 3.6% at $29.12 fully a week ahead of its earnings announcement, we noticed some traders positioning for downside in the pizzeria come January. This was done via a 1,500-lot long put spread in the January contract between strikes 20 and 25, which the trader put on for a $1.25 debit that requires at least a 17% move to the downside to break even by mid-January. The total volume here represented 31 times the normal level of activity seen in Papa John’s shares every day – and more than half the total number of option positions outstanding.
EGN– It’s been a cruel summer for Alabama-based oil and natural gas company Energen, which struck its 52-week high of $60.26 back on June 23 with all the bravado of a carnival hi-striker – and just as quickly came down again. In the ensuing month, Energen shares have been depleted of nearly a quarter of their value, translating to almost $20 off its June top. While the recent turbulence in its share price is reflected in a historic volatility reading of 35.6%, implied volatility has shown an inexorably widening gap against that historic reading in the space of the past month, and now reads at a 52-week high of about 44%, indicating that as its shares have continued to plummet, option traders are pricing ever-increasing risk of yet more turbulence (in other words, turbulence begets turbulence…). This implied volatility was barely shaken by last week’s Q2 earnings, which revealed a shortfall in results compared to street estimates that not even an affirmation of 2008 and 2009 guidance could remedy. Today its shares closed 3.7% lower at $60.22, but it looks like at least one trader may have seized upon an analyst upgrade of the stock to position for a return to those June 23 highs (and then some) by mid-June. This was achieved through a long call spread involving 7,260 lots in the January ’09 contract between strikes 75 and 85. Here it looks like the trader bought the lower strike for $2.05 and sold the upper for $0.50, creating a debit of $1.55 that first breaks even for the trader at $76.55 and creates an $85 ceiling on the trade. The price of the lower strike in this combination reflects a less than 1-in-4 chance that Energen shares can retake the $75 level by mid-January, but the size of this single trade represented nearly half the total number of open option positions in Energen, enough to send overall option volume to more than 17 times the normal level – and calls to their heaviest volume since the 52-week high was set back on June 23.
MER, – News of Merrill Lynch’s plan to shore up its balance sheet by shedding $30 billion in mortgage-backed assets and issuing new stock sent implied volatility down nearly 25%. Shares reversed early-session losses to close 7.6% higher at $26.18, but there was little indication today of option traders backing away from put positions that convey the right to sell Merrill Lynch shares. Heavy buying interest has been observed in August puts at strikes 17.50 and 22.50, while call volume at the August 25 level has shown two-way traffic between buyers and sellers. The same has been true of the action one month ahead at the September 25 call line, where fresh volume here is going to buyers and sellers.
C, – While speculation is rising that Merrill’s move could set the stage for a ripe new round of writedowns in the sector, Citigroup shares closed 5.8% higher to $18.45 as about 256,000 options traded equally to puts and calls. Heavy interest was seen early on at the August 15 put strike, along with what may be put spreads in the September contract between strikes 15 and 17.50. A 10,000-lot straddle appears to have traded in the January 2010 contract at the 20 strike, involving a combined premium of $9.30, which it looks like the trader sold in order to avail him- or herself of the time decay effect to erode the value of the position and allow it to be closed out profitably. Realizing the near-term volatile risk of any short option position in the financials, it appears that this trader bypassed the January ’09 contract completely and opted for the relative obscurity of the year 2010 to put this trade on.
PWAV, – Powerwave Technologies Inc – Shares closed 1.2% higher at $4.16, as an increase in options trading volume to 3.5 times the normal level appeared in the January 5.0 calls, which were bought today at 55 cents apiece. The buyer here appears to be positioning for a break to levels not seen in Powerwave Technologies since November 2007 – meanwhile, implied volatility at 84.4% represents a sizable elevation above the 67.6% historic reading on the stock ahead of its Thursday earnings report (the implied vol reading has come down from a 10% spike early in the session to rest at the current 84.4% level.
GPS, – Shares in everyman clothier Gap Inc rose 1.4 % to $16.36 today as we registered an increase in options trading volume to 5 times the normal level well in advance of the Gap’s August 21 earnings report. Today’s volume was fresh and heavy as a pair of durable chinos at the August 17.50 call line, which sold to the bid heavily at 25 cents per contract in what may represent traders taking premium on a bet that Gap shares won’t break $17.50 by August 15 (despite having tested that level last week). Implied vol at 43.8% shows a slight decrease from the 44.4% historic reading on the stock.
TIE– There was no shortage of takeover-driven stocks today either, as evidenced by the action in Titanium Metals Corp. Implied volatility rose nearly 12% at 88% today – its highest reading in at least 52 weeks and a full 22 percentage points above the historic reading on Titanium Metals Corp stock more than a week in advance of its earnings report. With calls outmoving puts by nearly 10 to 1 today (and trading on their heaviest volume in more than a month), most of the action is based in August 12.50 calls (Titanium Metals Corp shares are up 9.9% to $11.71 at present), which are trading at 55 cents apiece and on sharply elevated implied volatility (102.5% at this strike alone), implying strong buyer demand at this strike. We should mention that Titanium has been the target of many and varied takeover rumors before –recent rumor speculation tipping Boeing and Chalco as possible buyers. Titanium Metals Corp shares closed 10% higher at $11.72 today.
CSC– Formless takeover chatter also appeared to be driving the action in CSC today, with shares up 2.7% to $47.16 and a boost in options trading volume to 6 times the normal level (the highest level of call activity in more than a month) as call-buyers flocked to the August 50 and 52.50 strikes in seeming anticipation of an upside move of 6-12% for the stock (not including option premiums). Implied volatility ticks in at 42.6% at present, which is little change from levels recorded over the past two weeks but shows a mighty elevation over the 29.4% historic reading on the stock. Comparing those figures together should convey that option traders are pricing in an additional 44% price risk to CSC shares compared to what they’ve exhibited historically. CSC is due to report earnings on August 5.
ALXN– Shares in biotech Alexion Pharmaceuticals, which develops drug therapies based on blocking so-called “complements” rose 8.8% to $87.00 after surprising the market with Q2 profits of 6 cents per share (street consensus had favored a loss heading into the report). What caught our interest is that implied volatility in Alexion options – while it’s come off by more than a third since the numbers were out – remains at 39.8% highly elevated against the 33.9% historic reading on the shares. This is an indication that the options market was taken aback by Alexion’s earnings surprise and is still undecided about the sticking power of the current share price – which means there’s still a risk premium being added to options prices even with the numbers already out. Earlier today we noticed options trading at twice the average level, with most of the action at the suddenly-in-the-money August 80 call strike. It wouldn’t be surprising to see a trader take profit on this call position, given that it increased in value nearly 72% overnight to $8.50. Since then we’ve seen traders take to put spreads between strikes 65 and 75.
ELNK– Shares in Earthlink gave back gains of as much as 10% earlier today to close flat at $8.70, after the company surprised the market with net income of 48 cents where street consensus had predicted about 36 cents per share. As was the case with Alexion, Earthlink’s implied volatility at 44.3% remains elevated above the 38.2% historic reading on the stock – in fact, it’s barely budged since the earnings report was out. This means that the options market is tacking on a higher premium to lock in share prices over the next month as the market grapples with the right going price for its shares. An increase in options trading volume to 6.6 times the normal level bypassing the front month and buying into upside at the more-cost effective September 10 strike, which traded for 55 cents to more than 2,600 buyers today.
