Today’s tickers: WMT, SHLD, WFC, SGR, ELN & SAP
WMT – WalMart Stores Inc. – Investors are likely asking at what cost WalMart managed to make itself look successful over the holiday season as it today slashed earnings forecasts for the year. The move was industry wide as consumers keep their pocket books firmly shut. The revelation sent its shares lower by 7.7% by lunchtime to $51.30, but option traders didn’t really seem to be betting on much larger declines. Rather it appeared that they were making the bold assumption that its shares might reel right now as they dabbled in at-the-money January put options, but the tone one month further was more buoyant with selling predominant at strikes as low as 42.5 through 47.50. There was good two way action at the 50 strike.
SHLD – Sears Holdings – Shares rallied 20% to $48.39 as Sears revealed that its sales had been okay for the holiday season with its “layaway” strategy at Kmart working well in keeping sales stronger than other retailers. Upside potential for its shares was capped in the view of option traders who bought January 50 strike calls but sold those at the 55 strike. In the February contract investors appeared more optimistic and bought both strikes where premiums of 1.80 were paid at the higher strike. In trading that suggests some stock holders might be thanking their lucky stars for today’s over-sized rally, some option traders bought January puts at the 35 and 45 strikes for fear of any giveback following today’s move. Implied volatility declined to accompany today’s share price gain falling from 93 to 83%.
WFC – Wells Fargo & Co. – Option strategists continue to figure out ways of playing the current decline at Wells Fargo, where late yesterday its CEO admitted that there would be job cuts following the acquisition of Wachovia. Some 20,000 workers have just been absorbed around the Charlotte-based hub of its operations. One investor maintained a bear stance using put options, which were rolled from the January 25 strike to the February 25 strike. The cost of rolling that insurance today was a net 2.45. Shares declined once again to $25.64. Option implied volatility declined a little to 98%, which doesn’t seem to match larger declines in January premium. Another interesting play today involved a credit spread in the April contract where an investor seems to be confident that the share price will hold above $20.00. By selling the 20.0 strike and buying the 12.5 strike around 2,000 times, the investor bags a credit of 1.85 on this trade, which would come good assuming Wells manages to remain above $18.15 courtesy of the credit.
SGR – Shaw Group. – A positive quarterly earnings report from engineering concern, Shaw helped shares to a 16% gain to $25.76. Call options expiring later this month were bought at 22.5, 25 and 30 strikes, while in the earlier part of the session investors appeared to sell into the rally as they sold February 30 strike calls as shares moved to their highest in three months. Implied volatility slipped to 83% while overall bullish option activity of 19,100 lots accounted for around one-third of existing open interest.
ELN – Elan Corp Plc, ADRs – Speculation seems to be mounting that the Irish drug manufacturer will update investors on sales of its multiple sclerosis treatment, Tysabri at a broker-sponsored healthcare conference next week. Shares have rallied off a $4.99 low lately and today are 13% higher at $8.60. Recent weakness has been attributed to perhaps slowing sales of Tysabri and fears for a joint-venture treatment with Wyeth for Alzheimer’s. One analyst says the shares could reach $20.00 before year end and that investors who bailed towards the end of 2008 were overly pessimistic on the stock. Today’s option trading suggests that one investor concurs and expressed his optimism using a clever combination in the January 2010 contract. The trade involved three legs with each deploying 5,000 contracts. The 5.0 strike puts were sold at 1.15 while a 10/17.5 call spread in which the trader bought the lower strike in exchange for the 17.5 calls was placed at a cost of 1.65. So the overall cost of placing this bullish trade is reduced by the proceeds from the sale of the puts to just 50 cents. That leaves the investor open to maximum gains of $7.00 per share in the event of a healthy rally even beyond the upper strike. The risk is that shares decline through the 5.0 strike by expiration, which happens to coincide with support from the 52-week low.
SAP – SAP ADRs – Comments from a company insider confirmed that the software maker will continue to cut costs in a sign that it sees no thawing of the harsh environment yet. The company slashed fourth quarter costs by $273 million and the prudent management style convinced investors to buy its shares today with the stock up 1.8% to $37.17. One investor did the prudent thing and rolled bearish protection by selling January 35 strike puts some 13,000 times out to the February 37.5 strike some 7,000 times. This seems sensible management in these uncertain times and a wise use of options under the circumstances.
