Today’s tickers: GE, USB, WMT, NTRS, BK & CVTX
GE – General Electric – UBS today sent a note to clients telling them that shares in General Electric were a ‘short-term sell.’ The likely excess of credit losses beyond existing company guidance along with reserves that are too low means that the company is at risk of maintaining its AAA credit rating. What that means for the stability and preservation of its dividend, the other half of the equation that CEO Immelt is struggling to juggle, we don’t know. However, an option trader was quick to jump at puts suggesting a bruising for shares in the world’s largest maker of power-turbines. This morning some 25,000 put options were scooped up at a 30 cent premium as investors pored over today’s worsening outlook. The trade was as large as the overall number of established option positions at the March 5.0 strike and would make money should shares be trading lower than $4.70 at expiration. However, along the route, the position would be increasingly profitable should its shares continue to slide and should implied volatility rise. Both events would positively impact put premiums in this case. Today, GE slipped 3.9% to $12.43.
USB – U.S. Bancorp. – The product of its fourth quarter earnings announcement this morning was to leave shares in the bank doing the opposite of its peer group. Declining net income was hampered by the market valuation of some of its assets, while provision for credit losses and an increase in charge-offs didn’t help. Shares are 20% lower at $12.29 while option traders wasted no time in saddling themselves up for the next victim of the financial meltdown. Our option market scanners honed in on heavy trading so far today where 100,000 contracts are in action. The big picture view is that investors are scooping up puts at strikes as low as 5.0 where few investors have so far dared to venture. Call spread activity appears geared towards credit spreads in which investors are selling lower strikes and buying same expiration higher strikes for an overall account credit. March expiration puts are the big story where we are watching volume tick higher by the minute, with more than 11,000 puts in demand where investors have paid a 40-50 cent premium to reserve rights to sell USB at the fixed $5.00 strike ahead of expiration. Implied option volatility at the February 12.5 strike is today at 160%.
WMT – WalMart Stores Inc. – Where will shares in WalMart be in a year’s time? Well, judging by the straddle played by one option trader this morning, the current view is at a share price somewhere between $34.50 and $65.50. The so-called ‘strangle’ combination involves the simultaneous purchase or sale of same strike put and call. With shares at the world’s largest grocer down 2.95 at $49.10 today the investor appears to have sold around 1,000 of these combinations at a net 15.50 premium. We use that gross premium to see the implied trading range through expiration. The January 2010 contracts at the 50 strike were used for this play today where implied volatility reads 40%.
NTRS – Northern Trust Corporation. – Shares rebounded sharply following today’s currency-bolstered earnings report after shares dropped on capital adequacy concerns earlier this week. Shares currently stand at $54.99 and are in 25% better shape than yesterday. The Chicago-based Northern trust noted that a doubling in revenue from extremely volatile foreign currency business helped raise group revenues by 18%. Investors bought February expiration calls at the 55 strike at 4.50 and 60 strike calls for a 2.50 premium. There was also some interest in protective put options at the February 50 strike. Overall option volume today of 14,500 contracts compares to open interest of over 34,000 lots across the entire board. The positive earnings news is behind the slump in implied volatility from 111% to 85% in today’s trade.
BK – Bank of New York Mellon – Despite a 15% rebound in Mellon’s share price to $21.49, option traders appeared to adopt a cautious stance as selling of 22.5 and 25 strike calls expiring in February seemed to be the focus. There was also a decent amount of put buying at the same expiry with more than 1,000 puts in action at each of the three strikes from 17.5 through 22.0.
CVTX – CV Therapeutics Inc. – A biopharmaceutical company specializing in the discovery, development, and commercialization of small molecule drugs used in the treatment of cardiovascular diseases, popped up on our market scanners this afternoon, in what appeared to be a repeat play of a 5,000 contract call spread seen one week prior. Last week one investor positioned a call spread at a net of 1.55, and since then shares of CVTX have accelerated to $11.61 from $10.83. Today this investor appears to have purchased 5,000 contracts for 2.30 at the April 10 strike and sold 5,000 contracts for 35 cents at the April 15 strike. This call spread cost 1.95 to initiate, and therefore the investor stands to make a maximum profit of 2.05 if shares of the biopharm can reach $15 by the time April showers begin to fall. The jump in the share price since last week has boosted the cost of the call spread by around 40 cents.
