posted by Bina | Monday, July 16, 2007
The week in options capped off with a note of bumper earnings, bullish action, but sharply diminished volatility.Click here for the best August expiration calls to buy now to play the strength in metals producers like Alcoa and Southern Copper, now in Option Strategist.
General Electric's (nyse: GE - news - people ) 10% increase in second quarter earnings was a gift horse to a market ready to trade on any kind of good news. With more than 200,000 GE options contracts moving in the hours after the report, the sheer level of volume was no surprise given the kind of hale and hearty earnings GE reported. More interesting still was the steep drop-off in implied volatility. Ahead of Friday’s earnings release, GE volatility had risen dramatically, peaking as the highest of the 30 Dow Industrials, on a relative basis.
Following the release, volatility declined sharply, which often happens once an earnings release clears the air of climactic uncertainty. In the case of GE, volatility declined by about a quarter to 16.5, slightly below what might be considered "normal," an arbitrary estimate being 17.5. We wondered if the drop-off might have been due to the announcement accompanying Friday's earnings report that GE is well in the process of cutting back its residential subprime mortgage exposure, subprime worries being the source of so much volatility in equity markets these days and the rise of the VIX "fear index" earlier in the week.
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Call volume swelled to about four and a half times the number of puts traded on Friday afternoon, concentrated at the August 40.0 strike, where more than 60,000 lots, and the 42.5 strike, where more than 15,000 lots had moved as of Friday afternoon.
For options traders seeking volatility, this week’s bumpy ride for Sallie Mae (nyse: SLM - news - people ) offered plenty of bang for the volatility buck, after a consortium led by J.C. Flowers moved to abort its bid to buy Sallie Mae due to the imminent passage of a House bill curtailing federal student loan subsidies. Impied volatility on Sallie Mae options shoe up some 147% in the wake of Wednesday’s news. Traders positioned for 39% volatility on what has traditionally been a fairly static Sallie Mae share (as of Wednesday, its historical share price volatility was just 7.8). Volume surged to 26 and a half times the daily average as traders made a mad dash to shed calls--some 9,350 lots at the July 55.0 strike were sold and traders rushed to pick up July puts at the 55, 50, 45 and 40 strikes at premiums driven up some $3 in price--a classic case of selling shares and buying volatility.
Sallie Mae shares--and its call volume in options--regained some equanimity by week’s end, trading at $53.63 after analysts pointed to the drop in share prices as a buying opportunity. The argument was that that the House bill did not change the terms of the acquisition agreement, and that J.C. Flowers may simply have seized a legislative opportunity to lock in a lower price. On the day after the carnage, more than 95,000 Sallie Mae options contracts were in play, with puts outmoving calls by a factor of 1.25, but a robust level of interest on both sides.
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Last week we noted a pickup in call-side activity in retail giant Target (nyse: TGT - news - people ) on rumors that the discount chain might be looking to divest its credit card business. This week’s action saw another jump in call-side volume concurrent with a story reported on Thursday that activist investor William Ackman may have acquired a 5% stake in the company. With shares surging nearly 7% to close at $70.00 on Thursday, options activity saw volume of around 9,000 lots in the 67.5 July call strike and 10,600 in the same strike in the August call series.
Since then, open interest at each strike tripled and quintupled respectively. In the case of the July call, these contracts were trading at premiums as low as $0.40 last week, and now command as much as $3.40, while the August contract, trading at premiums as low as $1.40 a week back now has an asking price of $4.60. Some of the volume here may be a matter of options traders looking to take profits on an intraweek surge in premiums on the flurry of rumors. Today options traders focused on the July 70 calls where close to 25,000 contracts changed hands. At current premiums investors are predicting that shares will expire at $71.50 next weekend.
Takeover chatter was the driver behind some curious option trading involving power toolmaker Black and Decker (nyse: BDK - news - people ). A sharp increase in option play late in the week further extended recent gains in relative volume and call-side interest for the ticker. We noted that these gains seemed at odds with the current earnings pressure and sober guidance for retailers and manufacturers with exposure to the housing and home improvement sectors.
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Underlying shares closed nearly seven% higher on Thursday, at $95.94. Black & Decker was also one of that day’s top implied volatility gainers, up 41.3% to 39%. Activity centered on the call side, where buyers were looking to snap up quick at-the-money calls at the July 95.0 strike before expiry, paying premiums of $2.60--a near doubling in premium price--in order to do so. Premiums are also way, way up--in excess of two and three dollars--at the August 95.0 and 100 strikes, where volume in excess of 1,350 circulated in early trading.
In truth, the takeover talk may all be bluster--so far, the only name tipped as a possible buyer was General Electric, a prospect quickly nixed with the release of GE earnings.
In other news, shares in Alcoa (nyse: AA - news - people ) moved dramatically after news of the purchase of Canadian aluminum producer Alcan (nyse: AL - news - people ) by London-based Rio Tinto, staging an 8.6% rally Thursday through the stock's all-time high set in 2001. The deal rips Alcan from the jaws of Alcoa in what had become a nasty spat. Traders are now focused on the likelihood of a bid from Australian mineral producer, BHP Billiton (nyse: BBL - news - people ).
It seems that all of those Alcoa bulls finally got this one right--yet some perhaps wise cautionary protection was taken on the put side early Thursday. On the call side more than 20,000 contracts traded at the 45.0 strike in both July and August with shares up at $46.09. Speculation grew that Alcoa’s shares would keep going up, with fresh trading in the 47.50 strike from July to October. On the defensive side of trading the 42.5 and 45.0 strikes were heaviest traded in July and August earlier in the session.
General Electric's (nyse: GE - news - people ) 10% increase in second quarter earnings was a gift horse to a market ready to trade on any kind of good news. With more than 200,000 GE options contracts moving in the hours after the report, the sheer level of volume was no surprise given the kind of hale and hearty earnings GE reported. More interesting still was the steep drop-off in implied volatility. Ahead of Friday’s earnings release, GE volatility had risen dramatically, peaking as the highest of the 30 Dow Industrials, on a relative basis.
Following the release, volatility declined sharply, which often happens once an earnings release clears the air of climactic uncertainty. In the case of GE, volatility declined by about a quarter to 16.5, slightly below what might be considered "normal," an arbitrary estimate being 17.5. We wondered if the drop-off might have been due to the announcement accompanying Friday's earnings report that GE is well in the process of cutting back its residential subprime mortgage exposure, subprime worries being the source of so much volatility in equity markets these days and the rise of the VIX "fear index" earlier in the week.
Special Offer: VASCO Data Security (VDSI) has more than doubled since January. Have you missed the boat if you didn't buy yet. Click here to find out and for guidance on dozens of other growth stocks in OTC Insight.
Call volume swelled to about four and a half times the number of puts traded on Friday afternoon, concentrated at the August 40.0 strike, where more than 60,000 lots, and the 42.5 strike, where more than 15,000 lots had moved as of Friday afternoon.
For options traders seeking volatility, this week’s bumpy ride for Sallie Mae (nyse: SLM - news - people ) offered plenty of bang for the volatility buck, after a consortium led by J.C. Flowers moved to abort its bid to buy Sallie Mae due to the imminent passage of a House bill curtailing federal student loan subsidies. Impied volatility on Sallie Mae options shoe up some 147% in the wake of Wednesday’s news. Traders positioned for 39% volatility on what has traditionally been a fairly static Sallie Mae share (as of Wednesday, its historical share price volatility was just 7.8). Volume surged to 26 and a half times the daily average as traders made a mad dash to shed calls--some 9,350 lots at the July 55.0 strike were sold and traders rushed to pick up July puts at the 55, 50, 45 and 40 strikes at premiums driven up some $3 in price--a classic case of selling shares and buying volatility.
Sallie Mae shares--and its call volume in options--regained some equanimity by week’s end, trading at $53.63 after analysts pointed to the drop in share prices as a buying opportunity. The argument was that that the House bill did not change the terms of the acquisition agreement, and that J.C. Flowers may simply have seized a legislative opportunity to lock in a lower price. On the day after the carnage, more than 95,000 Sallie Mae options contracts were in play, with puts outmoving calls by a factor of 1.25, but a robust level of interest on both sides.
Special Offer: Ceradyne Technologies has doubled since November but still has a P/E of less than 15. Click here for more undervalued "best buys" in Upside.
Last week we noted a pickup in call-side activity in retail giant Target (nyse: TGT - news - people ) on rumors that the discount chain might be looking to divest its credit card business. This week’s action saw another jump in call-side volume concurrent with a story reported on Thursday that activist investor William Ackman may have acquired a 5% stake in the company. With shares surging nearly 7% to close at $70.00 on Thursday, options activity saw volume of around 9,000 lots in the 67.5 July call strike and 10,600 in the same strike in the August call series.
Since then, open interest at each strike tripled and quintupled respectively. In the case of the July call, these contracts were trading at premiums as low as $0.40 last week, and now command as much as $3.40, while the August contract, trading at premiums as low as $1.40 a week back now has an asking price of $4.60. Some of the volume here may be a matter of options traders looking to take profits on an intraweek surge in premiums on the flurry of rumors. Today options traders focused on the July 70 calls where close to 25,000 contracts changed hands. At current premiums investors are predicting that shares will expire at $71.50 next weekend.
Takeover chatter was the driver behind some curious option trading involving power toolmaker Black and Decker (nyse: BDK - news - people ). A sharp increase in option play late in the week further extended recent gains in relative volume and call-side interest for the ticker. We noted that these gains seemed at odds with the current earnings pressure and sober guidance for retailers and manufacturers with exposure to the housing and home improvement sectors.
Special Offer: Cops love 'em, bad guys hate 'em: tasers. Jim Collins advised his readers to buy Taser (TASR) in April at $8. It's more than doubled in the past three months. Last time Taser made a big move in 2003-2004, Collins' readers rode TASR from $3 to $30. Click here for all of Collins' currently recommended stocks in OTC Insight.
Underlying shares closed nearly seven% higher on Thursday, at $95.94. Black & Decker was also one of that day’s top implied volatility gainers, up 41.3% to 39%. Activity centered on the call side, where buyers were looking to snap up quick at-the-money calls at the July 95.0 strike before expiry, paying premiums of $2.60--a near doubling in premium price--in order to do so. Premiums are also way, way up--in excess of two and three dollars--at the August 95.0 and 100 strikes, where volume in excess of 1,350 circulated in early trading.
In truth, the takeover talk may all be bluster--so far, the only name tipped as a possible buyer was General Electric, a prospect quickly nixed with the release of GE earnings.
In other news, shares in Alcoa (nyse: AA - news - people ) moved dramatically after news of the purchase of Canadian aluminum producer Alcan (nyse: AL - news - people ) by London-based Rio Tinto, staging an 8.6% rally Thursday through the stock's all-time high set in 2001. The deal rips Alcan from the jaws of Alcoa in what had become a nasty spat. Traders are now focused on the likelihood of a bid from Australian mineral producer, BHP Billiton (nyse: BBL - news - people ).
It seems that all of those Alcoa bulls finally got this one right--yet some perhaps wise cautionary protection was taken on the put side early Thursday. On the call side more than 20,000 contracts traded at the 45.0 strike in both July and August with shares up at $46.09. Speculation grew that Alcoa’s shares would keep going up, with fresh trading in the 47.50 strike from July to October. On the defensive side of trading the 42.5 and 45.0 strikes were heaviest traded in July and August earlier in the session.
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