Today’s tickers: MOT, RIO, ICE, ERTS & CHK
MOT – Motorola Inc. – In an attempt to revamp its product line-up and find a successor to an unsuccessful Razr, Motorola just announced a new cellphone operable over third-generation networks to be made available in North America, Latin America and Asia. The phone will be made of recyclable plastic bottles and will be available through TMobile. Motorola came under fire for failing to stem seven consecutive quarterly earnings declines, along with failure to follow the lead of Apple or Blackberry by adopting touchtone screens and full keyboards. The news boosted shares at Motorola to $4.62 as they stretch towards $5.00 for the first time in two months. The option market was set alight by heavy demand for call options reserving rights to buy the stock at a fixed price of $5.00 per share ahead of the series February expiration. Overall option volume of 49,000 was heavily weighted towards call buying at the February 5.0 series where some 39,000 contracts changed hands as shares advanced. Implied volatility jumped one-fifth to 89% as dealers raised the premium on the speculative play.
RIO – Cia Vale do Rio Doce – ADRs. – Much optimism surrounded commodity and emerging market theories Tuesday as the first concrete signs of President-elect Obama’s economic stimulus plan was revealed. Despite a broadly stronger U.S. dollar, which is usually commodity price bearish, emerging market currencies including the Brazilian real rose in value to express support for strengthening actual and anticipated flows back into those economies predicated on the success of the American spending package. Shares in Brazil’s largest copper producer, RIO jumped 5.6% to $14.89 to reflect a resumption of demand while option traders dove into bullish call options expiring in January. Heaviest-trafficked was the 15 strike where 13,500 calls were bought at around 1.00 each. Investors also bought 3,800 calls at the 18.75 strike where current open interest reads 5,228 lots. Implied options volatility of 82% was steady. Further forward contracts reflected even more bullish expectations as investors appeared to sell put options expiring in 12 months time at the 10.0 strike while buying 25 strike call options. The trade resulted in a net credit of 65 cents to investors.
ICE – Intercontinental Exchange – Despite an annual rise in futures volume, ICE yesterday shook investors’ confidence and confounded analysts’ predictions when it reported a 22% drop in commissions generated by over-the-counter energy trading. Such transactions are not generally recorded each day making them far less transparent than on-exchange business where investors can see reported volume numbers by the second. ICE shares melted 13% following through on late selling yesterday accompanying the earnings report. Today with shares trading at $63.66 and well –off the 52-week high at $175.91, option traders sold call options expiring in two weeks at the 65 and 70 strikes where they drove premiums down from 8.20 to 2.90 and from 3.80 to 1.45 respectively. As they positioned for further share price weakness put buyers were attracted to the January 65 strike where 1,200 lots of volume exceeded the existing value of open positions at that strike price.
ERTS – Electronic Arts Inc. – With its shares reeling from failure to launch successful new games coupled with demand headwinds, option traders today attempted to box shares in Electronic Arts to a range of $10 to $20 by mid-2009. They appeared to sell a sizeable volume of June expiration strangles using 10.0 strike puts and 20.0 strike calls for a gross premium of 2.90. Investors expect ERTS share price to remain within that strangle range and would keep the premium if they did so. Today shares are trading 3% better at $17.34 and if they kept rising into June’s expiration those investors would only start to lose money above the strike price by the value of the premium they take in today. So a breakeven point of $22.90 would see them start to lose money. On the downside, should shares reverse course they would not lose money until shares had fallen to at least $7.10. Investors seemed to also purchase $22.50 strike calls at 1.35 perhaps in conjunction with the straddle in a combination that reflects more upside potential but at a reduced cost.
CHK – Chesapeake Energy Corp. – Investors in the nation’s second-largest provider of natural gas were rewarded for their patience in the company, which faced a PR crisis late in 2008. The company made what turned out to be short-sighted shelf filings, which would have enabled them to offer stock, which of course hurts existing shareholders. That sparked talk of a liquidity crisis, which the company and several onlookers said was nonsense. And so today the company came through on promises to cut spending and boost liquidity by selling some 98 billion cubic feet of proven gas reserves in the Anadarko and Arkoma basins. The deal to a private equity group generates $412 million for Chesapeake. The news was well-received by shareholders and helped send CHK’s shares 5.7% higher to $19.16. Option traders piled straight into calls expiring in January as they bought strikes 17.5 through 22.5. Calls at the February 20 and 22.5 strikes were also bought. Once again implied volatility stood pat and is trading at 82%.
