Today’s tickers: PTV, F, ODP & VIX
PTV – Pactiv – Hard to know whether there is any substance behind the Wall Street Journal’s story that the maker of Hefty refuse sacks is in deal talks with Apollo Global Management or whether it’s just trash-talk. But investors have got the deal-bit between their teeth and have already pushed shares higher by 18% to $28.27 but not before they were earlier propelled to $29.41. The WSJ says a deal maybe struck between $34-$38, which helps explain the appeal of call options at the $30 strike price at expirations from May through August. The uncertainty of the news sent implied volatility surging from 32% to 58%, while volume today has completely eclipsed the number of existing option contracts held on the stock. There is also interest in the June $25 strike puts but it’s hard to state that investors are cashing in here in the event the bulls are right. Premiums at that destination fast-eroded over the weekend to 65 cents losing more than half their value.
F – Ford Motor Company – Naturally the broader U.S. market took a blow to the gut on account of heightened fears for European recovery. Ford’s April sales took a 17% nosedive on the continent at the very moment that its European incentive plan came to an end and competitors were able to creep in and find a way to better serve customers. But the domestic U.S. recovery seems to be more important to some investors as the auto industry recovers from a dip to annualized sales volume of 10.4 million to 11 million. While demand was sparked by incentives, the experience of GM in its welcome return to profitability today shows optimistic trends for the broader industry. Most important of all is the reduced reliance on incentives results in higher prices at dealerships. The industry has also gone through severe cost-cutting programs, which may be staring to play out as it escapes the bankruptcy days. Although Ford’s share price is weaker today at $11.78 option investors seem to have a passion for both May and June expiration call options at the $13.00 strike price where early volume of 10,000 and 5,000 contracts was evident. The May premium of seven cents is an inexpensive way of playing the rebound while a 34 cent cost at the June expiration would require a 13.2% share price gain through expiration. Investors also paid a $1.70 premium to buy calls expiring in January at the $12.50 strike.
ODP – Office Depot Inc. – The nation’s second largest retailer of office supplies was well on the way to at least a share price recovery when ahead of first quarter earnings the shares surged to $9.19. Today they stand lower alongside the broad market at $6.33. Investors remain worried by the threat from WalMart, Staples and Target and point to eight consecutive quarterly sales contractions since the start of 2008. The company has also been affected by the loss of government demand in California where furloughs and budget cuts in its number two market is crimping cost-cutting efforts to recover market share. However, one options player today appears to hold greater faith in the recovery and sold some 6,000 put options expiring in June for a 30 cent premium. This indicates optimism that the share price will stay above the $6.00 strike price and even recover. If it doesn’t the investor will have shares put to him at an effective price of $5.70, which is a little higher than the flash-crash low at $5.47. Options implied volatility nudged down about 4% to 68% today.
VIX – CBOE Vix Index – Broad market volatility popped once again this morning with Wall Street’s fear-gauge higher by 6% at 33.19 as the S&P index drops by 0.9%. With commodity prices sliding in Asia in response to a slump in stock prices it does feel like the chainsaws are being tossed from one asset class to the next market center. In the June Vix options today an investor appeared to write around 17,000 put options at the 22.50 strike price for 75 cents. Should volatility remain elevated during the next five weeks those options would expire worthless. It’s hard to blame this investor for writing premium on what could indeed be the low-likelihood outcome of fear subsiding over the summer. The trade does have its risks in that put premiums could jump significantly if governments in Europe agree on implementing fiscal restraint. However, this investor is probably taking the view that the recent slide into the teens for volatility was simply an extremely optimistic view for the global recovery and one that underpriced the risk of a setback.
