Early Morning Call – September 27, 2007
Sallie Mae’s no October bride…but options show it’s no July-style jilting
Our futures arbitrage indicators are pointing to a higher opening for U.S. stocks, with futures on the S&P, Nasdaq and Dow Jones all trading at premiums to fair value at this early hour. European stocks are trading in modestly higher territory early in the session, while Asia-Pacific benchmarks closed broadly higher. The Nikkei 225 and Hang Seng indices tacked on 2.4% each, while the Straits Times index added 1.6% to close at 3,709.17.
Options in SLM Corp (SLM), popularly known as Sallie Mae, were liquid throughout yesterday’s session before the company confirmed late in the day that a consortium led by J.C. Flowers, Bank of America and JP Morgan Chase would not honor the terms of a $25 billion buyout struck in April to acquire the student loan provider. Sallie Mae shares closed 2.7% lower yesterday at $45.01, but the carnage was nothing like the 10% drop in prices on July 11, when the market first caught wind that J.C. Flowers was keen to back out of the deal. Again, while option action on that fateful July day saw holders of long positions dash for the exits, we observed call shedding in the November contract at strikes of 50 and up. Contracts closer to the money traded to buyers and sellers as Sallie Mae reiterated its position that it would seek all available avenues to force its original buyers to honor the terms of the sale agreement.
Today’s U.S. data calendar includes new home sales data for August, with the market likely inured to bad news out of housing. Earnings are due out today from KB Home (KBH), the second homebuilder to report earnings this week, after Florida-based Lennar Corporation (LEN) reported the biggest quarterly loss in its 52-year history. While option positioning in the homebuilders shows nothing to indicate buyers willing to wager on near-term upside for actual homebuilders, we continue to observe some divergence in retailers with direct exposure to the housing market. Bed Bath & Beyond (BBBY) surprised to the upside after the bell, and bullish sentiment gathered pace in Sherwin-Williams (SHW) yesterday as takeover rumors spurred investors to buy out-of-the-money October calls.
Rebecca Engmann Darst
Equity options analyst/Financial Writer
