Today’s tickers: XLE, AMGN, CIT, LEH, CMC, MAS, JCG, TXN, CY, MSFT
XLE – Mounting dollar strength and rising consensus on waning demand sent crude prices lower today, creating a “breakfast of champions” for stocks that showed staying power for most of the session. Shares in the Energy Select Sector SPDR closed 1.6% lower at $70.96 – nearly $10 off its 50-day price average. We took a look at the option activity to see whether traders might be positioning for continued unwinding from the year’s highs, and found a 10,000-lot put spread in the December contract between strikes 63 and 70 that seemed to reflect an outlook of further declines. Both sides of this spread traded to the middle of the market, so we cannot pin down the order flow here with certitude, but given the prices paid relative to bid/ask values, it appears likely that the trader bought puts at the 70-strike level for about $5.28 per contract, selling as many lots at the 63-strike for about $2.54 apiece. Using a long spread at these levels allows the trader to knock off about half the price of the long put position, while putting a cap on anticipated downside. Incidentally, a put spread could also be sold short at these strike levels to bet on a rebound in oil prices by year’s end. In this case the trader would take the $2.74 spread as a credit, looking for a rebound above current levels by December 19.
AMGN – Unusual options activity occurred this afternoon in biotech Amgen, the maker of drugs for cancer and psoriasis, just one day after the stock benefited from Goldman Sachs’ decision to add the stock to its “conviction buy” list. Shares racked up another 52-week high today with this afternoon’s 1.4% gain to $65.10. What caught our attention, however, was not the call activity – which outnumbered that of puts by a factor of 1.4 – but a diagonal calendar put spread using distinctly out-of-the-money strikes in September and October. Again, this volume was logged to the middle of the market, so our read of the direction is largely conjectural. But it looks as though the trader may have sold 10,000 lots of September 52.50 puts for 26 cents apiece – reasonably assured that this credit will remain intact as Amgen shares remain well above the 52.50 level over the next month – and then bought 10,000 lots of October 55 puts at 76 cents apiece. This isn’t strictly a directional play, but a means of using volatility and time decay to advantage. Assuming this is the way the volume went, the trader is content to allow the value of the short September put position to dwindle away at a more rapid pace than the long October position. This long October put, meanwhile, could gain in volatility (and value) if Amgen shares turn tail and decline by mid-October. Current premiums suggest just a 13% likelihood of Amgen shares dropping $10 by that deadline.
CIT – A sizable 1-by-2 call spread, possibly put on by a well-capitalized individual or an institution, caught our attentions today as it would seem to imply a slow-but-sure road to recovery for CIT Group, the provider of commercial and real estate financing. Shares in CIT Group are down 60.9% for the year to date, but have recovered 51% of their value from July 15 lows – outpacing the gains seen in other S&P financials, a group that CIT Group has otherwise lagged mercilessly behind for much of this year. Shares reversed early losses handily to close 3.2% higher at $9.51. The long 1-by-2 call spread activity in the January ’09 contract involved a trader buying 1 $10 strike call for $2.10 and selling two 15-strike calls for 70 cents, resulting in a net debit of 70 cents per trade. Essentially the trader is looking for continued upside past the $10.70 level in the first of the year, but is confident that the share price won’t breach $15 – half the position at this strike in a 1-by-2 call spread is uncovered short, leaving the trader vulnerable to exercise (and unlimited losses) in the event of a share price rally. The volume here appears to have involved about 19,000 lots at the lower strike and about 38,000 lots at the upper strike, making the size of the trade worthy of note in its own respect – the volume here represented 16 times the normal level of activity seen in CIT Group shares.
LEH – News that legendary investor George Soros had upped his holding in seen-it-all brokerage Lehman Brothers kept shares higher for much of the day before a late-session snooze resulted in a flat close at $16.19. With heavy traffic on both sides of the sentiment divide as traders sought to close out positions at August strikes between 15 and 17.50, we were more interested by traffic in the October contract, which showed interest in 22.50-strike calls and 20-strike puts. Volume at each of these strikes appeared to have been sold.
CMC – Shares in steel producer and recycler Commercial Metals Co. declined 2.5% today to $25.65 on no apparent news catalyst – and it looks like one trader picked the moment to position for a recovery in share price by year’s end. Shares are down $14 since peaking at their 52-week high back on June 24 – a decline that has been more or less unmitigated ever since. The option activity today, which pushed overall volume to nearly 6 times the normal level, appeared in a 6,000-lot long call spread in the December contract between strikes 30 and 40 for a debit of about $1.59 – a position that requires at least a 22% recovery from current levels to break even, and could even imply a test of that 52-week high by year’s end.
MAS – Shares in Masco Corp, the owner of KraftMaid Cabinetry, Delta Faucets and Liberty Hardware closed 5.5% higher today at $18.97, one day after similar gains for a number of leading homebuilder stocks. While Masco shares are down 12.4% for the year to date, the current share price represents nearly a 40% premium to its July 15 low, and a comparison of its option implied volatility (47%) to its far-higher historical record of volatility (54%) indicates that option traders have relaxed much of the risk expectation for Masco shares in the coming month. While we observed in yesterday’s column that many option traders had pointedly not abandoned defensive protections in homebuilders in later-2008 contracts despite respectable gains for these stocks since mid-July, today’s action in Masco shows one trader staking a bet on continued moderate upside for Masco by mid-January. It looks here as though the trader positioned long of the January 20/25 call spread, a position that would carry a debit of $1.35 – but may have shaved 35 cents off the price of the position by selling 12.50 puts. The resulting trade would leave the trader looking for a break above $21 – a 10% gain from current levels – but cap the upside at $25. Overall option activity in Masco Corp showed up at 15 times the normal level.
JCG – Shares in preppy clothier J. Crew Group bounced quickly back from earlier session lows to close 2.4% higher at $27.84. An increase in options trading volume to nearly 6 times the normal trading level showed traders positioning in December 27.50 puts at $3.74 – very close to the asking price for a buyer although this trade was logged to the middle of the market. It also appears as though this trader may have sold a strangle in the March contract, selling a put and a call concomitantly at strikes 25 and 40. This position would have yielded a $4.04 credit that could have covered the cost of the December put position completely, while creating a perimeter of anticipated share price movement into next spring. While a sold strangle is not a directional trade per definition, the strikes involved here would seem to prolong the already very muted performance of J. Crew shares. While the stock has traded as low as $27 and as high as $52.40 over the past 52 weeks, the stock has traded consistently south of the $40 level since May 30, when it saw its biggest loss in two years on a cut in sales guidance for 2008. Overall, call and put positions in J. Crew are relatively evenly divided.
TXN – For a second consecutive session we’re seeing heavy call volume in Texas Instruments, where shares closed 1% lower at $25.52. Today’s trading activity took overall options volume to 3 times the normal level, with brisk interest at the September 25 and – more significantly – the October 30 strike calls at 25 cents apiece. We cannot confirm that this is opening positioning occurring, since the current volume lies within the reported level of open interest. The 25-cent premium at this position reflects only about a 13% chance of probability that Texas Instruments shares can break past $30, a level unseen in the chipmaker since late-June. Put-buyers, meanwhile, also appear to have targeted the October 22.50 level.
CY – Option implied volatility in Cypress Semiconductor, the maker of memory chips, image and optical sensors, and programmable logic devices, rose 20% on the session today amid a 12.8% rally for shares to $30.65. The advance for shares started before the bell, after the company announced an offer to buy nearly $600 million in convertible bonds. The current implied volatility reading at 45% still rests slightly below the historic volatility reading on the stock. An ensuing wave of call buying at strikes 30 and 31 in the September contract sent overall options trading volume to 4 times the normal level.
MSFT – Finally, while Microsoft shares closed flat at $27.84, today’s heavy volume of around 111,000 contracts included the apparent rollout of a short volatility position from the August 26 straddle to the same position in September. The price of the September straddle would provide a seller with $2.49 in initial premium today, more or which he or she is likely to keep if Microsoft shares show little vacillation between now and September 19.
