Today’s tickers: LEH, JAVA, DELL, INTC, SCHW, AKAM, KG, APO, TGT, ORCL, KO
LEH – Shares in Lehman Brothers bounded sharply out of the gate today, closing 4.6% higher at $14.35 on speculation of a possible takeover by Korea Development Bank. The move in Lehman comes a day after respected analyst Richard Bove floated the notion of Lehman’s vulnerability to a hostile takeover bid given the dissonance between management and the market’s view of the company’s value, and amid generally bullish action in financials today on back of interest rate-dovish and largely reactive, rather than proactive, rhetoric from Fed chairman Ben Bernanke speaking in Jackson Hole. Response from option traders has been interesting, not least in the October contract, where one fund a trader appears to have played against the “easy-fix” rumors by buying a long 8870-lot put spread between strikes 2.50 and 5.00. This trade was entered for a 25-cent debit, creating an initial break even of $4.75 – requiring an almost disastrous $10 drop. The trader stands to gain as much as $2.25 – 9 times the money at risk – if Lehman shares make a cataclysmic drop, but don’t break below the $2.50 level. Given that options are pricing in only about a 3% chance of Lehman shares dropping below $5 by October 17 – and virtually no chance of a bust of $2.50 – it’s clear that this trader is playing this 25-cent position as a cheap, long shot.
In another October play, traders may have sold 27-strike calls at 22 cents apiece in order to fund a long collar between strikes 12.50 and 20 – a protective play on an underlying stock position that would otherwise cost 33 cents to put on. In this case the trader would have bought the put at the 12.50 strike and sold the call at 20, with that short call declaring a limit to any upside in which this trader can participate. This too would seem to suggest a very muted outlook for Lehman shares, even if a bid is forthcoming.
JAVA – Elsewhere, we observed a few large-scale call-side trades in tech stocks. Options activity in Sun Microsystems caught our attention as shares closed .60% higher at $10.00, as a trader bought a 11,000-lot long call position at the January 12.50 line for 53 cents. About an hour later, a trader sold a 10,000-lot position in 12.50 puts for $2.90. Both of these strategies may be interpreted as bullish on the underlying share price – Sun shares not having traded at this level since June.
DELL – We observed similar call-side position in Dell, where shares closed .32% higher at $25.29, but have perked up some 38% since bottoming out on April 14. Roughly half today’s active volume in Dell options is centered in January 30 calls, where 10,000 lots traded to the middle of the market at 67 cents. Based on the premiums paid, we’re surmising that the calls were bought in a bullish wager on Dell Computers that would put shares back at levels not seen since October 2007.
INTC – Another large-volume long call position was entered today in Intel, whose shares closed 2% higher at $23.49. The trader in this case appears to have bought a 10,000-lot position in January ’09 30.00 calls at 22 cents apiece – this premium reflecting only about a 10% chance of the position landing profitably by mid-January expiration. Intel shares last traded above $30 in 2004, but this protracted pullback has done little to upset the relative overweight of open call positions to puts. Calls current outnumber puts in Intel by a factor of 1.3, and this proportion has remained stable for many, many months.
SCHW – Rumors of a Deutsche Bank bid for Charles Schwab appear to be fueling speculative options activity in the brokerage this morning as shares closed 3% higher at $23.73. The rumors pumped implied volatility 19.3% higher to 47.8% as options traded at nearly 14times the normal volume. With calls outtrading puts by more than 8 to 1, traders bought calls into bullish momentum, particularly at the September 25 line, with interest spilling over into this strike price in the October contract. At least one trader opted to take the other side of the bet, buying a 1,500-lot long position in September 25 puts for $1.85 per contract.
AKAM – Takeover chatter, albeit of a more diffuse nature, is also coloring the volume in options of Internet content delivery company Akamai Technologies, whose shares closed 4.8% higher at $23.67. Options volume has tripled against the daily average, with calls outmoving puts by more than 17 to 1. Buying interest has settled on front month calls at strikes 25 and 30, with volume at these same call strikes in the October contract trading to buyers and sellers. Implied volatility on all Akamai options is up more than 20% on the session at 54.1%.
KG – Shares in King Pharmaceuticals rose 8.5% to $12.19 today after disclosing that it had made a $1.4 billion bid to acquire Alpharma which the company rejected. Option volume in King Pharmaceuticals tripled on the news, due largely to a spell of fresh buying in January 12.50 calls at $1.30 per contract. The premium on this position at $1.30 requires upside to $13.80 to break even, a level that would put King shares within $2 of its 52-week high set back in August 2007. King shares have hobbled this month since losing 17% in a single session after reporting a decline in Q2 profits of more than a third.
ALO – Meanwhile, Alpharma’s finding out that it’s good to be the….object of King’s affections. Shares rose more than 42% to $34.20 on the news – a premium to the $33-per-share bid that Alpharma nixed. The news has lit a fire under Alpharma calls, which are outpacing puts by nearly 3-to-1. Heaviest volume appears at the September 35 calls, which are trading mostly to the middle of the market, while calls at the 40 strike appear to have mostly sold. Activity at the December 35 line showed calls trade to the middle of the market at $2.10, while a trader on the put side roughly half an hour later appeared confident enough to sell 35-strike puts for $1.80 per strike.
TGT – Shares in quirky retailer Target are up 3% at $52.64, three days after reporting a decline in Q2 profits that still exceeded consensus street estimates. Profits were hurt by a consumer pullback in nonessential items, where Target has tended to excel. Slowing profits or none, it’s been a banner month for the retailer – its stock is up more than 17% this month alone. One trader looks to have positioned for stocks to remain above the $50 watermark into September expiration while taking in premium by selling a 3,500 put spread in the September contract between strikes 47.0 and 50. The trader took a 65 cent credit that represents the maximum potential profit to be yielded if both contracts expire worthless on September 19.
ORCL – A similar strategy was employed in options of Oracle, where a 3,000-lot spread using puts was deployed in the front month contract between strikes 22.50 and 24 as shares printed a 1.8% rise to $22.70. The spread involved here totaled 90 cents, which a bullish seller of the spread would take as a credit in hopes of seeing Oracle shares break their 52-week high of $23.62 by September 19. A buyer of the put spread would take a soberer angle, paying the 90-cents as a debit while betting on a widening of the spread between the two strikes that would result in both contracts being exercised. Bear in mind that the maximum profit for a long buyer of this put spread is just 60 cents – less than the money at risk in the form of the 90 cents paid for the position. In this case, both sides of the spread are reported at the middle of the market, so we cannot confirm whether this trade was entered by a buyer or a seller. Open interest shows existing call and put positions at a near-even split.
KO – Shares in Warren Buffett favorite Coca-Cola are up 1.6% to $54.37, pacing gains in the Dow today. Murmurings of a global slowdown in recent sessions have sparked some market investors to call for positioning away from large-multinationals with heavy European exposure , and option activity over the past week has shown some signs of traders positioning more defensively in December/January contracts in some multinational tickers. It’s in this light that the action in Coca-Cola is interesting, as it appears that a trader entered a 7,000-lot calendar put spread, selling 50-strike puts in the January 2010 $4.00 and buying the same position in the January ’09 contract for $1.60. Along with a $2.40 initial credit, the trader gets some defensive cover against a 7% pullback between now and mid-January.
