Today’s tickers: VIX, CHK, SJM, SGP, GE, YHOO & RL
VIX – CBOE VIX Index – It’s hard to claim that stocks fell due to the emphatic Obama victory Wednesday, but there’s no denying that Super Tuesday’s euphoria hit skid row today. Option traders jumped back into contracts offering insurance against higher volatility ahead judging by the surge in volume in contracts ranging from 60 to 70 in the November VIX contract today. Meanwhile the VIX index rose 10% to 52.50 after several days of sharp declines as investors mulled the impact of tighter trading ranges. Market indices reportedly fell after Nancy Pelosi raised the prospect of lame duck talks and a further stimulus package. However, one report that grabbed our attention came from the Center for Automotive Studies, which highlighted the potential costs of failure at the three U.S. automakers in terms of job losses and consumer retrenchment. It really put an interventionist policy back on the agenda. Maybe for Obama and the market it’s a case of buy the dream, sell the reality.
CHK – Chesapeake Energy – A 10% rally in shares of oil and gas supplier, Chesapeake Energy, was accompanied by elevated option market activity, much of it indicating further gains. The reason behind the gain in the stock to $25.16 was an unconfirmed rumor that Britain’s BP might bid for the company. Traders pounced on the speculation given the devastation caused to the share price courtesy of the recent slump in energy prices. Even at today’s share price the company has lost 66% and investors feel that a bid could be made at a substantial premium compared to where shares are trading. The put/call ratio indicated extremely bullish trading patterns and implied five calls traded per put throughout the morning. Most of it was located in the November contract where the 25 and 27 strikes were actively bought. However, the most active was the 30 strike where speculators drove premiums from as low as 20 cents to 95 cents throughout the morning to secure the right to purchase shares at $30.00 ahead of expiration in 16 days. In the December contract investors targeted strikes as high as 35 on today’s rumor.
SJM– SJ Smucker Co – We observed option activity in preserve-maker, Smucker, on Tuesday and today we’re seeing the pattern repeat. The action has seen around 10,000 November 50 straddles put into play with shares falling to $44.49 today. We cannot tell whether straddles were bought or sold but the gentle decline in implied volatility suggests that this is more of a passive rather than aggressive play intended to see stability in the underlying around the $50.00 mark. Today’s play involves 6,400 calls and the same volume of puts where the combined premium is 6.75 and option implied volatility reads 49%. The seller would require Smucker shares to remain within a range earmarked by $43.25 and $56.75 by expiration. The closer the settlement to the central 50.0 strike the more of the premium is retained.
SGP – Shering Plough Corp. – Two large trades have gone through on maker of cholesterol pill Zetia, which seem to suggest a period of depression for the share price. SGP combines Zetia with Merck’s Zocor to produce Vytorin. Today Merck noted that promotion of Vytorin is coming under increasing scrutiny from the Department of Justice’s civil division as to whether the company misled consumers about the pill. Today’s option trades involved two slugs of 11,000 contracts in the January calls where the 17.5 strike was sold at a premium of 90 cents while the shares are 2.2% lower at $15.15. Meanwhile the same amount of 25 strike calls traded at a nickel to the middle of the market, which confuses matters somewhat. This could be a credit spread whereby the investor is risking 6.65 to make the net 85 cent premium, which does seem a skewed trade in terms of risk and reward. The position at the lower strike is clearly fresh judging by the existing 4,006 lots of open interest at the strike.
GE – General Electric – Shares in GE are down 1.4% at $20.46 but there seems to be some optimism over a floor underneath the share price even if on a longer-dated time horizon. Once again we’re seeing options especially active in GE and as we look over where volume clusters occur, we note that investors happen to be selling 15 strike puts in the March contract and buying the 22 strike calls. Elsewhere further evidence shows up in the January 2010 contract where the 10 puts are sold in exchange for long call positions at the 20 strike.
YHOO – Yahoo! Inc. – Yahoo! options activity paints a bullish picture so far today with a put/call ratio of 0.32 indicating health call activity. The November 14 and 15 strikes are feeling the heat where current option volume of in excess of 22,500 at each now exceeds the existing reading of open interest. If this activity was primarily driven by investors wanting to close their positions at those strikes today, we’d undoubtedly see weaker share prices. However, this action doesn’t quite jive with today’s news of Google’s abandoned attempt to pal up with Yahoo! in its Internet advertising partnership. Google backed down in the face of antitrust objections. Technically this could leave Yahoo! floundering but investors seem happy to throw money at Yahoo! shares today.
RL – Ralph Lauren – Implied option volatility at luxury retailer Ralph Lauren has slipped 14% to stand at 58.5% despite ongoing fears over a dire shopping season for retailers especially higher-end ones. The stock is higher by 1% at $50.00 and one reason we can see behind today’s volatility decline is some confidence in the share price from a put seller. In the December at-the-money 50 strike an investor took in a premium of 4.0 and effectively underwrote a decline beneath $46.00 on the stock. Either an investor sees value in the stock at current prices and doesn’t anticipate further weakness, or is already short the stock and is happy to buy it back effectively at $46.00.
