Today’s tickers: CERN, DOW, AA, NTAP & BAC
CERN – Cerner Corp. – Recent hints that President-elect Obama would drag hospital and doctor’s office technology into the 21st century have done wonders for Cerner – a specialist in providing infrastructure in this field. With its shares 1.9% higher at $38.95 to close the year, option traders raised a flag today with a 10,000 lot spread trade on the company, where only 17,343 lots exists. We’re just guessing from the positioning today that an investor is already long the stock and has used options expiring in June to help lock into a profitable position. The trade involved the sale of 10,000 call options at the 42.5 strike for a 3.30 credit, coupled with the purchase of 10,000 put options at the 32.5 strike. A shareholder would therefore benefit from a rise in the shares and at expiration could have them called away at the strike price, which would fuel gains of around 10% in addition to those resulting from wherever the shares were originally purchased. Should Cerner lose value, the long put position should increase in value and since the investor is actually taking a net credit here, it’s all the better.
DOW – Dow Chemicals. – Investors are still reeling form the collapse of the Kuwait Petrochemical join-venture and seem to be questioning what Dow’s response will be in terms of capital expenditure for 2009. Shares are down yet again today and are bucking the broad market trend. At $15.08 they have lost a further 3%. Meanwhile open interest in bearish put positions has jumped from 3,300 one week ago to 8,325 contracts at the January 12.5 strike indicative of investors’ belief that the show isn’t over yet. And today investors have added what appear to be many more bearish bets that Dow will continue to decline before options expiration. Some 11,700 contracts have been traded at 20-25 cents so far today as bears seem to have no intention of letting go of this story.
AA – Alcoa Inc. – For the second day in a row shares of Alcoa are rebounding on the value theme having been decimated from a 2008 peak of $44.42 down to $6.82. In the final session of the year its shares are 4.5% better at $11.21. Option spreaders have sold call options expiring in January 2009 at the 10 strike in exchange for calls expiring in 2010 at the slightly higher 12.50 strike. February calls appear to have been bought outright at the 12.5 and 15.0 strikes in expectations of a continuation of a recovery for Alcoa’s share price. However, one bearish investor seemed to have a special appetite for puts expiring in April at the 10 strike where 4,242 contracts were traded at a 1.50 premium. The series is especially active and is home to an existing 11,192 positions already.
NTAP – Netapp Inc. – Shares in the memory-device maker jumped almost 5% to $11.20 this morning following a story suggesting that bigger players in the field might find this company an appealing target stock. Call option buyers were out in force and spent 31 cents per contract on options granting buying rights over the underlying stock at a fixed price of $15.00 before January’s expiration. By noon more than 11,000 lots had traded in this series where prices have now reached 40 cents. Meanwhile in the February contract put options with selling rights at the 15 level were purchased more than 2,300 times at a 1.85 premium. This appears to be fresh positioning and drove implied volatility 14% higher to stand at 64% as investors dealt with the prospect of the rumor being little more than mere speculation.
BAC – Bank of America. – Relatively high option volume took a boost from a far-dated option combination known as a straddle involving the 15.0 strike calls and puts expiring in January 2011. We cannot tell whether the straddle was bought or sold but that it traded at a combined 10.36 premium with stock trading at $13.08. Implied volatility that far out is lower compared to the overall reading on Bank America at 84%. But the trade is an interesting one. If the straddle was sold, the investor will retain the premium should BAC’s shares remain within some pretty large confines as denoted by the premium. Adding the 10.36 to the strike gives an upper break even of $25.36, or 69% above the strike. Subtracting the premium yields a lower break even of $4.64. Those are pretty drastic parameters and speak of either kill or cure for the behemoth. While the market treads water and investors mull the prospects for recovery for financial companies, this investor could be watching premium slip into his account as implied volatility dries up.
