Today’s tickers: CAT, GE, WYE, COV, CCI & XLF
CAT – Caterpillar Inc. – A bellwether for the broader economy, Caterpillar brought more disappointing news to the table this morning, reporting a 32% slump in fourth quarter net income and lower than expected projections for 2009. CAT estimates earnings for 2009 at $2.50 per share on revenue of approximately $40billion which was way off Wall Street’s assessment of $4.35 per share on revenue of $45billion. The five-year surge in demand for CAT’s heavy construction equipment domestically as well as in emerging markets has come to a screeching halt, prompting the announcement of 20,000 job cuts among other cost-cutting measures. The implied reading of option volatility declined from 70 to 56% after earnings while the most popular destination for option investors was at the 30 line in February and March expirations where puts were bought. In the May contract more puts were sold than bought perhaps indicating that investors believe that shares should have recovered by that point in time.
GE – General Electric – Despite a 3.7% share price rally to $12.50 today, possibly attributable to affirmation from S&P that GE won’t lose its AAA-credit crown on account of last Friday’s fourth-quarter earnings results, option investors can’t seem to get enough downside protection. The February 10 strike is heavily-trafficked in Monday morning activity where more than half of the 63,000-strong volume was initiated by interested buyers at a volume-weighted average price of 37 cents. The share price would need to decline to $9.63 before buyers break even on the deal at this stage.
WYE – Wyeth – Pfizer confirmed last week’s deal broken by the WSJ, when it provided a sweetener to its quarterly earnings saying it would pay around $50 per share for Wyeth. The combined drug manufacturer would have 17 products generating in excess of $1 billion in annual revenues. Wyeth’s shares were slightly higher at $44.10 while once again its option activity was active with almost 30,000 lots in play within the first hour of trading. Since the deal involves a $22.5 billion consortium loan by Pfizer, there is possibly some risk that the deal isn’t struck until the signatures are dry on the paper and hence shares in Wyeth are not fully valuing the proposal. The February 45 strike was option traders target today as they bought around 8,000 lots at the prevailing 70 cent premium. The 47.5 and 50 strike where also active on volumes in excess of 2,000 contracts each. Option implied volatility slumped by 44% to stand at 23.7% on Wyeth.
COV – Covidien Ltd. – The health care and medical products maker released higher than expected first quarter earnings for 2009, exceeding analyst expectations, and realized by increased sales of a generic form of the painkiller OxyContin. Shares are 5% higher at $37.00 while call option buyers stepped in to lift prices in the February 40 line at premiums of 55 to 75 cents. They also bought March 35 strike calls as well as the January 2010 contract at the 45 line where the price of securing buying rights is 2.20.
CCI – Crown Castle International Corp. – The owner, operator, and leaser of towers for wireless communication popped up on our ‘hot by options volume’ market scanner this morning due to an 8,665 contract strangle positioned at the January 2010 expiration. This investor is selling volatility on the underlying stock which is currently at $20.08 and has an implied volatility reading of 73%. By selling 8,665 out of the money puts at the 17.5 strike for 4.0 and 8,665 out of the money calls at the 22.5 strike for 4.25, this investor brings in a net premium of 8.25 per contract. If the share price on CCI can remain within the breakeven points located at $9.25 and $30.75, then the premium is securely pocketed and the strangle play successful. As we look at this trade, we can see shares appear ripe for a recovery and the upside looks appealing after the stock recently traded at its lowest point of $8.75. For this investor, the rebound in the stock will likely allow him to benefit from the both things that positively impact this strategy, which is a decline in implied volatility and the erosion of time.
XLF– Financial Select Sector SPDR –Perhaps an option trader called the market well Friday when he bought a ton of February call options at the 10 strike where premiums ranged between 31 and 63 cents on heavy volume that day. Today’s 2.2% rally in the fund to $9.18 is once again characterized by heavy volume where almost 100,000 lots at the same 10 strike have traded before noon. Overall option volume is 312,000. Notable, however, is that two separate blocks of 25,000 contracts were sold at premiums of 60 and 62 cents during the morning indicative of perhaps some profit taking on Friday’s turnaround. At the February 11 strike some 28,500 contracts were in action with more initiated by sellers rather than buyers perhaps indicating that there is still some distrust in a financial rally. Investors do seem to prefer buying calls at the March expiration in the 10 calls where more than 34,000 lots are at play where premiums have ranged from 86 cents to 1.07. Implied volatility of 90% is a tad lower than the reading at the close of last week.
