Today’s tickers: DOW, ROH, CVS, LDK, KEY & C
DOW – Dow Chemicals Company – We noted in our Wednesday commentary that emergent talk that the K-Dow joint-venture with Kuwait was on the ropes. Over the weekend the Kuwaitis landed a crunching body-blow as they called off the agreement to invest in Dow’s chemical business sending its shares reeling to the canvas with a 20% loss in value to $15.00. The investment was meant to help cut costs for the company as well as fund the acquisition of Rohm & Haas whose shares dropped by the same amount. Option traders seized the opportunity Wednesday to boost put positions at the January 17.5 strike ahead of the year end deadline for the deal, while today they are having to lower their expectations further to the 15.0 strike where volume of more than 8,000 lots stacks up at least four times when compared to existing open interest. Premium at the strike is 1050% higher today at 1.15 per contract compared with just 10 cents at Friday’s close. Bearish investors also paid a 35 cent premium to buy puts at the 12.5 strike also expiring in January. Call volume was also reasonably well represented, but much was instigated by sellers of premium, either from bearish investors or from investors quitting established positions. Calls at the January 15, 17.5 and 20 strikes were all sold as were February expiration calls at the 17.5 strike, which fetched one dollar per contract.
ROH – Rohm & Haas Co. – Last week’s conjecture that an unwed Rohm might only be worth around $20 per share isn’t really grabbing that much more attention from option traders today. We have noted put activity at the January 25 strike at a 70 cent premium but much of this activity appears to have come from sellers. With shares now trading at $51.80 and off today’s $47.23 low print, investors seem to be more prone to taking the view that its shares will at least find a floor above the pre-deal price in July of $45 per share rather than lower. As such put options are seeing a good two-way flurry of activity as traders play the ebb and flow in the share price as investors in the underlying aim for a better sense of accurate price discovery. Curiously the most actively traded contracts today are well out-of-the-money calls at the January 70 and 75 strikes. Once again the two-way flow of volume makes it hard to tell why the action is focused here. While they do, option market makers are dealing with the confusion by marking implied volatility much higher at 156% until option demand settles down.
CVS – CVS Caremark Corp. – Our market scanners picked up a bunch of call activity in pharmacy retailer, CVS where more than 6,000 January calls traded at the 35 strike. With shares rising to $26.96 today and bucking a weaker market, this looks bullish. However, on closer examination it appears that sellers have the upper hand and are perhaps trading in stale long call positions for as little as 3 cents apiece. Clearly they see little catalyst over the remainder of the life span of these calls to spur them on to a 30% gain ahead of expiration.
LDK – LDK Solar. – Shares in Chinese solar-wafer maker, LDK are 1.4% better today at $12.69 and it’s the options activity that lands it on our screening pages once again. Volume equivalent to around 10% of its overall open interest is in play today and practically all of it is in a single play. An investor appears to have sold around 11,500 put options expiring in January at the 10.0 strike at a 20 cent premium. The company’s product is used as the main ingredient in solar cells and supplies many of the leading companies in the field. One concern for the company is that the decline in the price of energy as a direct result of the global downturn dims the prospects for alternative energy as gas-guzzling drivers collectively breathe a huge sigh of relief. However, the company recently announced aggressive expansion plans at least in terms of its body count where it hopes to add 10,000 workers throughout 2009 and a further 50,000 during the following two years. Shares in LDK recently hit a low of $9.49 but this investor is banking on a move back in the opposite direction.
KEY – KeyCorp. – Regional banking lender, KeyCorp saw an interesting option combination trade on the Philadelphia Exchange early this afternoon involving a 10,000 lot spread in the June contract. With its shares trading down 2.5% at $7.50 an investor coupled the sale of 7.5 strike puts with the purchase of 12.5 calls in what’s known as a risk-reversal. In this case we’re unsure if the investor has a long or short stock position. The sale of the more expensive put nets the investor a credit using the combination of 1.70 per contract, but that doesn’t account for any stock position.
C – Citigroup Inc. – Shares might be lower by 1.8% at $6.61 today in Citi, but put option activity is sending off contrarian signals. Option volume of 60,000 contracts makes the stock options today’s most active individual issue, but a decent amount of volumes has appeared in the June expiration puts at both the 6 and 9 strikes, where time and sales reports indicates the work of sellers. That tells us that at least some investors expect better prospects by mid-2009 for the bank. On the other hand another notable trade today appears to be the roll between the January and February puts at the 6 strike where an investor prolonged a bearish stance at a net 45 cent premium.
