Today’s tickers: HIG, CL, SWY, CHK, GFI, CSCO, MIR & VIX
HIG – Hartford Financial Services Group – The company announced that owing to its ability to release certain reserves on property and casualty claims it was boosting its 2008 earnings forecast, which helped send shares screaming higher by almost half to $10.45. Option traders didn’t miss out on the chance to position themselves for the better outlook and targeted call options reserving rights to buy shares at prices well above the current level. Within an hour of the open investors had scooped up 8,200 contracts allowing them to buy Hartford’s shares at $12.50 by December, which amount to more than four-times the current number of wagers in the option open interest. Buying of December calls at the 15.0 strike numbered 5,700 contracts and almost the same as current positions. In hopes that time is a great healer, optimistic investors bought calls at the January 17.5 and 20 strikes on volume at least double that of established positions. A less uncertain outlook caused option investors to mark-down implied volatility to 171% on Hartford’s options.
CL – Colgate Palmolive – Our scanners have brought to our attention some interesting volume building in options at consumer staples manufacturer, Colgate. Shares in the company have broadly held above $60.00 over the recent five weeks and even during the meltdown in October fell as far as $54.36. We suspect that matched trade volumes of 5,000 contracts at the December 60 and 55 strike puts has one investor expecting that shares will likely remain above the $60.00 price (today shares are at $60.79) by expiration. The 60 puts were sold for a credit of 2.50 while the 55 puts were bought at 1.00 meaning that a credit put spread was set in action at a net premium to the seller of 1.50. The trader retains that premium despite a share price fall to $55.00 but that cash erodes penny for penny beneath the lower strike leading to a breakeven at $53.50 in the event of further weakness. Investors also bought calls at the January 75.0 strike some 3,800 times at a 40 cent premium.
SWY – Safeway Inc. – Readers may recall we noted heavy call selling at the December 25 line yesterday, which we suspected was the closure of an established long. Indeed we were right and today’s reading has subsided in line with yesterday’s sale of 11,500 calls. Today, a further 12,500 lots were sold and we reckon this means the investor is throwing in the towel on expecting Safeway’s shares to rally further than the strike price within two weeks. That’s unfortunate given the continued upwards trend in the stock in the face of otherwise bad economic news. Safeway shares are 6.3% higher at $22.79 today.
CHK – Chesapeake Energy Corp. – Oil shares are broadly lower given a continued downwards move for crude oil prices, which reached $41.56 earlier this morning in light of an awful employment report. However, most affected is the share price at Chesapeake Energy at $10.42 – down 12.2%. Chesapeake is the most actively traded via its options with early morning activity reaching 36,000 so far. What’s surprising is that bearish investors have a run on the stock firmly implanted in the back of their minds as the are reaching for downside protection over the next two weeks as low as the 5.0 strike. The company recently filed to issue 50 million shares, which has filled many investors with fear that there’s a liquidity crunch at the company. In response the company has stated that it’s in fine shape to handle the current economic crisis. Investors gulped up put options paying 20 cents for 2,100 contracts at the 5.0 strike, 60 cents for 3,200 contracts at the 7.5 strike and 1.55 for 5,600 lots at the 10 strike in December options. In the January contract at the lowest available 2.5 strike some 309 established bear positions compare to similar volume of 390 lots of fresh buying today at a 10 cent premium. Bears also bought calls at all strikes between 5 and 10 today. At a reading of 185% today, implied volatility on the options is fast approaching the peak of 200% established in mid-October on market weakness rather than company specific weakness.
GFI – Gold Fields Ltd. ADR – Let’s review. The American economy lost more than a half million jobs last month, the greatest number on record and is in confirmed recession, as is the rest of the world. Commodity prices are falling back through the floor as no signs of recovery are apparent and the monetary authorities’ printing presses are hard at work. Sounds like an ideal scenario for the loss of value of fiat money and a perfect one for the price of gold – but wait, is that the dollar we hear screaming ever-higher? Shares in South Africa’s second-largest gold producer slipped 5.3% to $6.83 as gold meets its challenges head-on. Earlier in the week a large investment bank downgraded the prospects for Gold Fields helping shares fall off their ladder. Still, one investor seems to think that its shares will breach at least $10.00 by January judging by a large chunk of call buying at that strike in which 14,400 calls have traded at 40 cents per contract. There is a large volume of open interest exceeding 52,000 lots already established and it seems that investors still believe in the outlook for gold given the deteriorating climate.
CSCO – Cisco Systems – The 75,000 lot volume on Cisco options today might lead some to conclude that the $700-billion federal bailout package is all heading to Cisco’s HQ. Two large trades have been reported in the January contract where 20,000 lots have been logged as bought at each of the 30 and 40 strikes at 3 and 1 cents respectively. Shares in the company are trading down 2.7% at $14.92. Even if this was a call spread in which the 40 strike calls were sold against a long position in the 30’s we’d stand agog given the seemingly slim chance that this outcome might prevail. We’ll have to see Monday whether some canny investor is buying back short calls sold at a higher premium weeks or months ago.
MIR – Mirant Corp. – An investor sold 10,000 December calls at the 27.5 strike for a mere 5 cent premium earlier. Shares in the company haven’t traded at the price in over three months and today stand 2.4% lower at $18.50. The trader is either reaping a $50,000 credit for bearing the risk of delivering shares at the strike price in two weeks or is closing out a stale long established over the summer as energy prices started to decline.
VIX – VIX Index – It’s interesting to note that despite a positive start to the week, which allowed volatility to decline, at no point has the index printed beneath a reading of 60 this week. At that level the market implies gyrations over the next 30 days of 3.75% per day. Today’s unambiguously bearish labor report is precisely the kind of fuel to stoke the next leg lower in the stock market and implied volatility as measured by the fear-gauge is taking no chances. Today investors reached higher as they bought calls at the 90 strike, paying a 25 cent premium in the expectation that over the next two weeks the VIX may point to even greater gyrations.
