Today’s tickers: NWL, MAS, CX, STX, HBC & HAL
NWL – Newell Rubbermaid Inc. – “The unprecedented rapidity of the economy’s decline makes it difficult to anticipate an economic rebound anytime soon. Our expectations are for a more challenging business environment in 2009 than any we’ve seen to date.” These words could have been picked out of Tuesday’s FOMC statement explaining why they slashed interest rates to the bone. But instead they belong to the CEO at Newell Rubbermaid, where shares have tumbled 26% today to stand at $9.74. Option investors stepped up to place bearish positions on shares in Newell, maker of consumer goods including the Graco brand of baby products as the company announced the loss of 10% of employees at its Atlanta, GA headquarters. Earnings projections for the fourth quarter were slashed from as high as 34 cents to as little as 6 cents per share. Only 36,900 lots of open interest were in place before today’s news, with most established on the call side. Today investors sold calls expiring in January at the 12.5 strike sensing little chance of any rebound. They also bought 2,600 put options expiring Friday at the 10.0 strike where only 230 open positions exist. Puts in the March contract were also bought at the 10.0 strike where investors paid 1.35 to establish 1,500 contracts.
MAS – Masco Corp. – A three-legged option trade jumped out from our market scanner this morning involving 15,000 options apparently instigated by a single investor, who sees through current share price weakness for the home improvement product maker. The trade centers on the January 2010 contract and takes advantage of the fact that shares in the company are trading 3.8% lower today at $10.65. The investor appears to have sold 5,000 put options at the 5.0 strike in order to create premium, which is used to offset the overall cost of a same-size call spread involving the 12.5 and 17.5 strikes. That spread outright costs a premium of 1.25 and would benefit in the event that shares rally out of recession. The breakeven here at $13.75 is further reduced by the 70 cent credit from the put sale to a share price of $13.05. We have observed several similar trading patterns in recent weeks of this style and it suggests that investors are scouring for stocks exhibiting strengths perhaps in specific cash flow or debt profiles, which would weather the recession. Essentially the downside risk here is that the company plunges towards bankruptcy should business dry up, in which case the investor is on the hook to buy shares at the 5.0 strike in the event that Masco’s share price halves.
CX – Cemex SA, ADR – Shares in Mexican cement producer, Cemex are 2.1% higher today at $9.72 and once again our scanners are picking up intriguing trading patterns. It appears that a collar strategy is being deployed using the January expiration where around 10,000 calls were sold at the 12.5 strike in exchange for the same amount of 7.5 puts. Traditionally a collar is used to help protect an underlying position from a decline in the share price. It’s not clear whether or not the shares were bought today or whether the collar protects an existing holding. The puts were bought at 55 cents and would protect a long position in Cemex, while the call sale at 35 cents helps dramatically offset the cost of protection.
STX – Seagate Technologies – Despite a rating downgrade on its debt earlier by Fitch, shares at the tech company are higher by 4.7% at $4.66. It appears that investors snagged around 7,500 bullish call contracts on the stock at the 5.0 strike with an expiration date of March. Premiums of around 80 cents were paid to add to the current 5,564 lots of established open interest.
HBC – HSBC Holdings ADR – A curious piece of investigative journalism appearing in today’s FT Lex Column suggests that British banker, HSBC isn’t fully reflecting its subprime losses, which if fully realized would catapult writedowns to beyond those of Merrill, UBS or Citigroup. We think this is behind a 7.8% decline in its shares to $52.33. Investors used options to write call options expiring Friday at the 55 strike for just 20 cents, while they handed over 80 cents per contract to buy more than 3,000 put options offering writes to sell shares this week at a fixed $50.00.
HAL – Halliburton Co. – Shares have given back earlier gains and are now lower by 1.4% at $18.17. Partly responsible for earlier gains in the energy services company were bullish options trades in the January contract, which helped diffuse the reading of implied volatility by 95 to 83% today. Investors sold 7,000 puts at the 17.5 strike at 1.45 premiums and bought 20 strike calls at a 90 cent premium. We’re only guessing, but we’d say this position is likely tied to a short position in the underlying.
