Today’s tickers: URBN, GE, INTC, MSFT, RIMM, ELN, SWY, GS & C
URBN – Urban Outfitters Inc. – On July 22 shares in retailer, Urban Outfitter closed at $32.57. the same day an investor put into action a 40,000 lot put spread through the purchase of 30 strike puts expiring in January 2010 and selling the same amount of puts at the 15 strike expiring at the same date. The net cost of doing this at the time – the difference between the premiums – was $450 per 100 shares. We’re not sure why the investor focused on such a long expiration date, but clearly was of the volition that the retail sector if not the entire economy was heading south. Today was payday as this investor closed the trade out at $1100 per 100 shares. The fact that Urban’s shares had reached the lower strike price meant that the maximum profit potential from the trade was met. Given the magnitude of the position, it’s unlikely an investor was playing this size of position naked. In other words, he probably held a long underlying position in the stock – perhaps not as big as the underlying option position, but whatever happened, today looks like a pretty nice pay day for this investor.
GE – General Electric – We always try to use our views on the option market to illustrate the forward thinking nature of investors who use them. Sometimes call and stock buying reinforce one another, which sometimes helps our analysis. At other times we find ourselves trying to piece together a jigsaw. The fact that options offer leverage is a major appealing factor since it offers the investor the ability to put on a position and leave it there instead of having to worry too much about the performance of the stock. In the current dire environment we recognize that there are possibly some fantastic deals to be had in the long-run. The trick is staying in the deal long enough to see your view played out. Our market scanner picked up heavy option volume on GE today at the January 25 line, where 29,000 calls and puts traded. With shares in GE lower by 7.2% today at $15.12, the practically worthless calls were bought at 18 cents while the puts traded at $9.65. This is a large combination in isolation and we doubt that this is the entire structure. It is more likely that the investor has an underlying short position in the stock. One possible rationale could be that the investor short of the calls is hoping that the dividend will be cut, which would deliver a windfall gain since that position must deliver to the long investor. However, GE today reaffirmed that it will maintain its dividend in 2009.
INTC – Intel Corp. – The warning from Intel’s management after Wednesday’s close couldn’t have been much worse. They, like everyone else, are suffering from declining orders and management has never witnessed the like. Once again, it’s at times like this that contrarian plays stand out stemming from the option market. While Intel’s shares are lower at $13.34 some heavy call volume has cropped up at the January 20 strike line where investors have snagged around 38,000 contracts at a premium of 15 cents. The option market currently assigns an 8% chance that this trade will come good by expiration, but with the incessant pounding that stocks have taken, an investor might simply be looking for greater odds that this trade will work in order to take a profit on this outside horse.
MSFT – Microsoft Corp. – It’s more of a mixed bag for the world’s largest software maker, Microsoft, whose shares are lower by 5% at a new 52-week low at $19.27. Heavy options volume of 157,000 contracts has traded ahead of lunchtime with most notable volume occurring at the November 20 strike calls were hopeful bulls paid a 56 cent premium for 12,000 lots. Meanwhile around 7,000 puts traded at both 19 and 20 strikes in the same month with investors risking 47 cents to secure rights to sell shares at $19.00 by expiration next weekend. In the December contract investors also doubled the amount of bearish bets they have against the share price at the 19 strike as some 15,126 contracts were bought at a 1.20 premium today. Breakeven would be $17.80 in this case.
RIMM – Research in Motion – With the launch of the Blackberry Storm via carriers Verizon and Vodaphone just a week away option traders placed bullish trades despite a 6.9% slump in RIMM’s shares to $40.24 today. The Storm will take on Apple Inc.’s iPhone 3G when launched and the company hopes to ship 2 million this quarter as it targets non-business users with its music-downloadable gadget. Call options securing the right to buy shares at a fixed $45.00 were heavily bought on volume of 17,157 lots at a premium of 1.15, giving a breakeven share price by expiration at $46.15.
ELN – Elan Corp. – Our market scanners picked out some curious bullish activity at Irish drugmaker, Elan today. The company is due to report earnings tomorrow and is pretty close to a 52-week low at $6.29 today. The company produces an attention deficit/hyperactivity disorder drug, Focalin, on behalf of Novartis and therefore has a royalty flow. Elan’s speciality is drug-delivery timing, which is possibly behind why Novartis is pleased to announce FDA approval for a ‘quick-action’ version of the drug for early morning users, such as children who need focus at that time of the day. The option activity stands out because we’re seeing healthy fresh buying of call options in the January contract at the 10, 11, 12.5 and 14 strikes. Buying at those four strikes made up 88% of today’s overall 16,187 volume, while option implied volatility added around 5% to 127%.
SWY – Safeway Inc. – We heard it said on business radio earlier that, unless retailers were selling food, they were currently in trouble. Option implied volatility at grocery chain, Safeway, is low relative to shares in other more troubled sectors. Today it reads 65% and compares to movement over the past year in the stock of 52%. With shares 0.9% higher today at $20.80 an investor is perhaps preparing for share price weakness below the 52-week low in buying November 20 strike puts paying a premium of 75 cents. Today’s 4,864 contract volume adds to open interest of 6,316 other bearish positions on the stock via options reserving selling rights. Still, more than one-in-four option positions on the company are on the other side of the fence at the December 25 strike call.
GS – Goldman Sachs – Investors continue to chip away at the share price at investment banker, Goldman, whose shares are lower by 7% at $62.13 – another 52-week low. Investors have been concerned that the conventional investment banking model and its reliance on what has become a rather clogged-up capital market simply can’t go on working. Despite its conversion to commercial bank status, analysts are now pointing to potential revenue weakness from its core markets. Today we’re spying fresh buying interest in puts at the December 22 and 20 strikes where volume of more than 3,000 contracts at each where only 500 lots of existing positions exist.
C – Citigroup – As its share price declines further, down today another 9.8% to $8.70, option traders quite literally have fewer options left to position bearish feelings on the stock. Both the November and December contracts have seen heavily trafficked puts at the 7.5 line, which is currently 13.8% lower than the current share price. In the December contract investors appear to be paying 95 cents for rights to sell Citigroup shares at a fixed $7.50 and have wagered 15,500 contracts adding to existing positions of 26,157 contracts. They are also bolstering bets at the 5.0 strike by one quarter more than yesterday’s open interest reading of over 16,000 contracts.
