Today’s tickers: CAT, CTX, SPLS, M, SAP, IDCC, FRE & SLM
CAT – Caterpillar Inc. – The government stimulus package might indeed create revenues and profits from the core of the economy outwards, but that’s not how one investor played the prospects for shares in Caterpillar. Investors are still reacting positively to the prospects for Caterpillar, despite the mid-morning index reversal, which has erased more than 100-Dow points from the rally. An investor appears to be adding to existing bear put spreads in the December contract in which 35 strike puts, just below Caterpillar’s shares are currently trading at $36.54, were bought 15,000 times while the lower 30 strike puts were sold. Should Caterpillar fumble and shares decline to the lower strike price the investor keeps the value of the distance between the strikes ($5.00) minus the net premium paid, which in this case is 1.08.
CTX – Centex Corp. – We’re still working on trying to understand quite why homebuilders’ share prices are so excited by today’s news. With 10-months worth of residential supply on the market and foreclosures still not necessarily at a peak, it’s still a little opaque as to why the measure would boost prospects for builders. The logjam in supply is in part a direct result of over supply. We can see the measures spurring consumers to take out a mortgage but not necessarily on a new home. Still, who are we to argue? Option bulls are out in force at Centex where its shares are 15.9% higher at $8.10. Meanwhile the December 7.5 strike calls have changed hands more than 9,000 times today at a 1.20 premium and the same January strike is also active at a 2.00 premium. In both cases option investors are close to doubling the number of bullish bets on the stock in today’s action. Call trading is currently eclipsing put buying by a factor of seven times. Implied volatility has fallen through the floor today as it dropped one-fifth to 134%.
SPLS – Staples Inc. – An analyst downgrade hurt shares at office-supplier, Staples in early trading sending its share price 8.2% lower to $15.84. Shares lately have challenged the October lows when implied volatility on its options peaked at 106%. Today volatility is on the rise at 93% as put buyers take the initiative seeking downside protection in the December contract where 9,300 puts were traded at the 17.5 strike (in-the-money) at a 2.25 premium. Buyers also rushed to buy 1,250 lots at the 15.0 strike where cheaper premiums of 1.15 were paid. There was also heavy activity at the 20.0 strike calls where more than 4,800 lots were traded at a mid-market price of 35 cents. We’re unsure if this is an investor looking for a post-markdown rebound or whether it’s a confident play that calls at the strike, which would require a 26% increase above today’s price, will never see the light of day over the next 24 calendar days through expiration.
M – Macys Inc. – Investors reversed a strong opening for Macys and have sent shares lower by 7% to $6.15. Implied option volatility remains static at 160% but we’ve picked up some decent option activity today. Calls at the December 7.5 strike have seen good two-way trade at a 40 cent premium while the January 10 calls were heavily sold where volume has now reached 12,500 lots. The position building appears to be fresh investor interest today given the fact that open interest of just above 2,000 lots appears at either strike. At the January 10.0 strike the delta reading of 0.25 indicates a one-in-four chance that shares will rise to at least $10.00 by expiration.
SAP – SAP Ag ADR – German software producer, SAP recently cited a tougher environment than post 9/11 to lay off staff and has since been in a $30-$40 share price range. Option investors continue to play defensively and today we’re seeing two further examples. The December 30/35 put spread has been bought with investors limiting downside potential to around the 52-week low, while at the January 35 strike an investor bought around 8,000 puts at a 3.30 premium. The lack of open interest at that strike indicates continued uncertainty for the company’s prospects over the final quarter of the year. Around one-quarter of the existing open interest is likely to expire worthless and is parked in the December 60.0 strike calls. Shares today stand almost 4% higher at $35.78.
IDCC – Interdigital Inc. – Wireless handset maker, Interdigital recently sought to secure license revenues from sales made by Samsung, which it alleged employed its proprietary technology. Over the past couple of days and in light of the ruling in its favor, we’ve noted bullish option activity surrounding the stock, which is flat today at $25.75. We continue to observe long call positions build in the December contract at the 30 and 40 strikes where investors have paid premiums of 1.35 and 15 cents respectively hoping to see shares ramp higher as earnings reflect greater core revenues. At the December 40 strike price, investors have bought enough calls to double the existing bull positions on the stock. As the shroud of uncertainty lifts surrounding the stock, options implied volatility has been marked lower by around one quarter today at 94%.
FRE – Freddie Mac – Today’s broad stimulus spending package helped fuel a surge in shares of mortgage lender, Freddie Mac to a mighty 62 cents. Don’t complain – that’s a 37% jump on the session! Option volume has been practically absent since the government took a sizable stake in an attempt to stop the blood-gushing from the housing sector. Today’s news of efforts to revitalize the mortgage market corpse has clearly woken some sleeping bulls from their torpor who have bought far-dated calls on the stock evidently looking for better times. In the April contract an investor spent 10 cents to buy around 250 calls at the lowest available strike price of $3.00. In the January 2010 series investors purchased rights to buy shares at $2.50 and $5.00 paying around a quarter for the privilege, while at the $30.00 strike an investor spent a nickel to buy 239 contracts.
SLM – SLM Corp.- Shares in student lender Sallie Mae popped on today’s fiscal spending blitz. The affirmation that president-elect Obama’s comments that money should be made available to allow young adults to enter college without having to worry about financing saw shares peak at $10.88 earlier for a 37% gain at one point. Meanwhile option implied volatility on the stock declined around 10 points to 114% as investors clearly assigned better prospects for future earnings. Option buyers paid a 1.60 premium for rights to buy the stock at $10.00 before expiration in the January cycle on some 8,000 contracts. At the same strike in the April series investors paid 2.60 to reserve rights to buy almost 1,700 lots.
