Today’s tickers: JNJ, TGT, LVS, EGO, LEH, XLF, LXK, EMC, GES, AXP, GES
JNJ – Shares in Johnson & Johnson set fresh multi-year highs today with a near-2% advance to close at $71.73, as traders were drawn to the company’s admixture of health care and consumer staples exposures. With calls out-trading puts by nearly 4 to 1 today the outlook appeared to favor higher highs heading into the home stretch of ’08 and early innings of ’09. This was evidenced by heavy buying at the 75 strike, not least in October, where the position costs 45 cents, but more dramatically in the January contract, where traders shelled out $1.40 per contract on volume of more than 10,000 lots. For those keeping track, today’s options market indicates a slightly less than 1-in-4 chance of a Johnson & Johnson break of $75 by October, while the odds are better than 1-in-3 that $75 will be in the bag by January.
TGT – Retailers bounced broadly on today’s pullback in oil, with shares in Target closing 3.8% higher at $55.04 on the development. With just north of 100,000 options trading by Tuesday’s close, however, we observed no shortage of residual defensive positioning, with what looked like a trader rolling a long position in January ’09 40-strike puts out to the same strike in the longer-dated January ’10 contract. Once again in the January ’10 series, a trader appears to have used a bearish call spread between strikes 40 and 50 to express a very unenthusiastic view on Target stock while still garnering premium, in this case generating a $5.80 credit in the hope of both positions expiring worthless.
LVS – Shares in the super-discretionary Las Vegas Sands Casino reversed earlier gains to close 1.3% lower at $46.80. A 5,000-lot put spread in the October contract between strikes 35 and 40 provided one trader with an intriguing means of playing the early session pull-ahead for shares. Both ends of this spread traded to the middle of the market, so our read on the direction of the trade is conjectured on the basis of the premiums paid. It looks here like a fresh, long put spread entered for a $1.00 debit – a position that would require nearly a $10 drop – 20% off the current share price – by October 17 to break even for this trader. While those look like long odds (current premiums suggest only a 19% chance of a break below $40 for Las Vegas Sands shares by October 17, and only an 11% chance of a break below $35), the maximum payoff for the trader of $4 represents 4 times the money at risk (the most this trader can lose is the $1 he or she paid at the outset of the trade), which may be attractive from a risk-reward perspective.
EGO – Broad shrinkage in commodity stocks followed thankful news of the dissipation of Hurricane Gustav, which observers over the long weekend feared could pose new perils to New Orleans’ system of fragile levees. With the market letting down its collective guard, gold prices dropped $40 today, bringing shares in Eldorado Gold Corp down 1.2% to $7.83 (well off its earlier lows). Contracts to buy and sell shares in the company – whose share price is otherwise up by nearly one-third this year alone – elicited heavy demand, trading at some 7 times the normal level. While today’s volume appeared firmly rooted on the call side of the sentiment divide, these contracts to buy Eldorado Gold shares traded with equal zeal to buyers and sellers, within open interest at the October 7.50 but in excess of it at the April 10 line. Option traders already hold 4 times as many call positions as puts in Eldorado.
LEH – Confirmation out of the Korea Development Bank early today of ongoing deal talks with Lehman Brothers aided early-session gains, but shares later reversed course to finish .37% lower at $16.03. Option traders generally appear more concerned with the issue of a takeover premium – if any – and here it looked earlier today like option traders are keeping expectations relatively subdued, with some indications of an upside bias from current levels. Assuming this was an opening trade (which we cannot, strictly, assume), at least one trader was confident enough to sell a 10,000-lot spread in the October contract between strikes 7.50 and 12.50 for an 83-cent premium, which appears to have been funneled into the deposit of a 10,000-lot long position in October 15-strike calls – a position whose $3.70 price tag would otherwise require another 12% upside from current share price levels just to break even. Both the short put spread and the long call position are indications of bullish interest, with the credit generated from the sale of the spread giving some relief from the purchase price of the call.
XLF – A different level of activity shook out in the Financial Select Sector SPDR, where shares held on to a 1.4% higher close on the session at $21.72 Earlier today we observed one trader take a contrarian long position to the tune of 30,000 lots in a September 18/20 put spread, buying the upper strike for 25 cents and selling the lower for 3 pennies in an apparent bid to see this basket of broader financials recede beneath the $20 line once again in the coming weeks. Spread plays, with the facility they offer for controlling trade costs, appear to predominate much of the action in the ETF today, with one trader using a 12,000-lot position in front-month calls between strikes 20 and 22. Because both ends of the spread traded to the middle of the market, we can’t make an infallible call on the direction, but a long buyer would have paid $1.43 looking upside past $21.43 but not exceeding $22 (an awfully narrow spread from our vantage point). A seller of the spread, on the other hand, could have pocketed that $1.43 per contract in hopes of both contracts expiring worthless with recession below the $20 line. Consider also that a trader selling that put spread risks losing 57 cents per contract at most –less than half the maximum potential gain. Elsewhere, we also observed traders appear to sell October 21 calls for $1.79, which fit neatly with an early theme of contrarian bets on a return south of $20.
But option traders took large-sized bets on the other side of the coin as well. In one 25,000-lot transaction a trader positioned long the October 24/26 call spread for a debit of 38 cents, looking for a break at least 11% above current share price levels – incidentally, the lower strike in that spread combination is priced to reflect only about a 30% probability of a break above $24 by October 17.
AXP – Shares in American Express likewise clung to a 1.6% higher close at $40.31, having given back much more prodigious gains early in the trading day. Even when shares were at their highs of the session we observed generally subdued expectations among many option traders toward this credit card issuer. Amex shares have already been stripped of one-fifth of their value this year as part of a broader decline that has brought shares down 30% in the past 52 weeks. Short call spreads were the vehicle du jour for expressing this view, deployed on a small-scale in the front-month, where a 1,000-lot spread was sold at the 37.50 and 40 strikes for a credit of $1.85. Another trader took an even larger bet in the longer-dated January ‘2010 contract, shorting the call spread in a 14,700-lot position entered for a net credit of $3.60 per contract that would wager on both contracts expiring worthless and allowing the trader to keep the credit as the maximum profit. This is an interesting trade from a risk-reward standpoint, as the span of the spread means that the trader could lose as much as $6.40 if American Express shares regain the $50 level by 2010 – far more than he gains if shares remain below $40.
LXK – Fresh call buying interest in printer maker Lexmark helped send overall option volume to 12 times the normal level as shares clipped early gains to close 1% lower at $35.61. Today it was the September 40 calls, at 30 cents commanding twice Friday’s price, which tantalized option traders. The unseemly interest in calls today drove implied volatility up about 15% from Friday’s levels, but at 38% the composite reading still rates below the 41.5% level of deviation shown by Lexmark shares historically. Lexmark last traded above the $40 threshold last November, and isn’t due for its next earnings go-round until October 21.
EMC – Barely a month after an apparent spate of institutional block call-buying in EMC Corp drove shares and enthusiasm for upside exposure to dizzying highs, today brought a large-size contingent of put buying take the other side of that bet. With shares down 3.5% at $14.75, a single trader appears to have taken an 85,000 lot long position in January puts conveying the right to sell EMC Corp shares for $12.50 by that month’s expiration. The 41-cent premium paid for this position is a slight discount from Friday’s levels and the volume involved here represents a little more than a third of the open interest. No confirmation as to whether this trade was an opening or closing transaction.
GES– Finally, with trendy clothier Guess? due to report earnings tomorrow, there’s little guessing where option traders are placing their bets today. They appear to be taking advantage of today’s .46% gain for shares to $37.44 to turn sellers of premium in September 45 calls as well as October 30 puts, sending overall traffic in Guess options to about 7 times the normal level. Both of these strategies suggest against dramatic share price movement to the up- or downside over the next month, as these traders feel they can sell these contracts with impunity without risk of exercise – particularly in the case of the October 30 put, where the activity is occurring well in excess of open interest. The front-month straddle is pricing in as much as an 11% price move between now and September 19. Implied volatility on all Guess options weighs in at just above 58%, only about a one percentage point edge on the historical volatility of Guess? stock.
