Today’s tickers: LAMR, WFC, HBC, MON & FDO
LAMR – Lamar Advertising – The fact that a recession is eating away at advertising revenue doesn’t seem to worry an investor today who sold a strangle on Lamar, which operates outdoor billboards in the U.S. and in Canada and Puerto Rico. The company’s share price is already well off its $44.48 peak and indeed has rebounded from an $8.69 low recently, which is possibly what this option investor has his or her eye on. The trade involved the simultaneous sale of July calls with a 17.5 strike and puts with a 12.5 strike for a gross premium of 4.50 per contract. Both contracts saw volume of 9,775 lots as the investor appears to be selling volatility, which currently registers a reading of 85%. Such volatility boosts the value of option contracts and in this case the investor considers the price high enough to sell in the expectation that the cost of protection exaggerates the likely outcome. Today its shares are 5.9% lower at $15.60. The investor probably figured that an earnings cave-in as the economy slows and in this case will keep the entire premium should Lamar’s shares remain within the two strike prices ahead of expiration over the next six months. The trade makes incrementally less money at expiration if its shares stray outside the two strike prices and would register actual losses should the shares bust below $8.00 or above $22.00.
WFC – Wells Fargo & Co. – Banking stocks took a punch in the gut when Oppenheimer’s rather accurate banking analyst forecast further loan loss provisions due to deteriorating quality of mortgage securities in the fourth quarter of 2008. Included in the dispatch was Wells Fargo, but as if that wasn’t enough, ratings agency Moody’s cut its senior debt rating based on indigestion of Fargo’s acquisition of Wachovia last year, which might increase losses but would certainly lower earnings ahead. WFC lost 2.7% to $26.81 by noon while the flurry of negative news drove up option plays on the stock. Our market scanners indicate that this security is the most actively traded so far today and has total volume of 211,000 contracts. Investors were quick to sell January expiration calls at the 27.5 strike in anticipation of a further downdraft for its shares. The sale of puts at the strike possibly indicates closing sales of bear positions, while investors also sold puts at the 20 strike and bought those at the 15 strike. Of more interest today was what appears to be a ratio put spread involving the purchase of 28 strike puts in the Feb contract (21,900 contracts) against the sale of 10,950 lots at the February 23 strike. The net debit is 2.35 meaning the trade starts to make money at expiration if shares are below $25.65 at expiration. Beneath a share price of $20.35 the investors is effectively short the stock and so loses money. Options implied volatility is only a little higher at 96.5% today.
HBC– HSBC Banking Corp. – ADRs. – In November shares of British banker, HSBC dropped on speculation that the prospect for its core Asian revenues was looking shaky and at the time we noted the purchase of a large amount of put options on the stock. It appears that an investor is rolling from January’s expiration to the March expiration today given the volume patterns between the 50 strike at each expiration. The January puts were sold today at 2.05 with HBC trading lower on the session at $48.78 some 36,000 times while March puts were bought on similar volume at 6.40. Clearly some investor doesn’t see any light at the end of the banker’s tunnel just yet. Option volume of more than 100,000 lots today represents one quarter of the overall open interest on the stock.
MON – Monsanto Company – Price is clearly not a factor for seed manufacturer, Monsanto as its shares raged higher by 14.5% to $83.90 today following bullish prospects from the company as it announced a doubling in profits for the quarter ending in November. Option traders seized call options expiring in January and February as the company indicated that it will implement price rises for its corn seeds and weed killer product, Roundup, stating that farmers would likely swallow the rise in exchange for enhanced yields. More than twice as many calls were in action today as puts while option volume of 88,000 compares to current investor positions of 389,335. Option implied volatility slipped 8% to 56% in response to the bullish news.
FDO – Family Dollar Stores – One of last year’s winning stocks continued to curry investor favor today as it raised its near-term guidance for earnings. The weaker economy is clearly playing in favor of the low-cost retailer and its shares responded by jumping 13.2% to $27.49. The 52-week high at $29.99 is possibly the next stop if the chain proves as recession-proof as it looks. The response from option investors was to place a ratio put spread on the stock in what looks like a clever play especially if the shares remain buoyant and steer a course north of at least $25.00. Today an investor bought puts at the 27.5 strike for 1.80 and sold twice as many puts at the lower 25.0 strike at 85 cents for a net cost of just 10 cents. The investor starts making money if shares breach $27.40 by February’s expiration and makes a maximum 2.40 per contract if the shares fall to the lower strike price. Since the investor is then net short of a put below this lower strike the stored profits are eventually eroded beneath a share price of $22.60 before losses are incurred in line with the falling share price.
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%.
