Today’s tickers: WAG, C, RIO, NVT & EWH
WAG – Walgreens share price took a smack on the chin despite a bullish start to the week. The near-15% slump in its shares created a fertile battleground for options traders thanks to the presence of liquidity and volatility. The company announced a 4% decline in quarterly profits thanks to a nasty combination of rising wage costs, store expenses and lower reimbursements for generic drugs. That potent potion is precisely why the stock is being punished today. None of the inputs are necessarily one off problems for the quarter and looking forward investors will need to see precisely what strategic shifts management makes to address the concerns.
Around 100,000 options contracts were in circulation Monday or put in an alternative context that’s around one-half of the overall open interest in the options series. Implied volatility surged by around one-third as uncertainty returned to the direction for the stock. Volatility jumped to 27.5%. Shares in Walgreens, which haven’t traded below $43 this year, fell to $40.31 to a 52-week low. October call options prices slumped with calls at the 40 strike losing 83% of its value to 1.25. On the other side of the coin put values surged. The October 42.5 calls for example, having settled at just a nickel on Friday, were actively traded at prices as high as $2.80 today.
It does appear that some investors are betting on steeper declines looking forward or simply betting that this might need a stronger prescription from management. There seems to have been a heavy amount of call option selling in the January 40 calls, where several blocks of 500 contracts were sold to the bid. Premiums slipped from 3.5 to 2.5 during the morning on volume of 11,650 lots.
C – Citigroup Inc. shares reacted positively to its forewarning of a 60% dip in quarterly profits earlier today and losses incurred to its exposure to subprime debt. Investors seem to have taken the confession with a huge sigh of relief and bought stock, perhaps in the hope that this is the bloodletting that people have demanded to see. Shares have recently held at the $45 support line. Implied volatility came off while put premiums at the 45 line sank by around one half. Shares in the bank gained 2.4% to stand at $47.78. The December calls at the 50 strike reflected optimism by investors as premium rose by one-third to 1.0. Shares slipped below $50 in late July and haven’t recovered since. The 50 line was the most active call line in today’s trade. In the March contract it looks as though a couple of thousand puts at the 42.5 line may have been sold against call purchases at the 50 and 55 lines.
RIO – Cia Vale do Rio Doce – Commodity companies shares remained an investor favorite given the solid case afforded to them by the combination of a weakening dollar and strong commodity demand. Shares in Brazilian copper miner Vale rallied 4.5% Monday to stand at $35.44. Premiums at the October 35 and 37.5 calls jumped by around one half on heavy volume. Strongest volume occurred at the January 32.5 strike in the put side where some 13,500 contracts traded. As the stock rallied premiums came off, but this looks more like put selling rather than buying indicating continued conviction in a rally in shares.
NVT – Navteq Corp. Options activity at 26,000 comprised around one-half of overall options open interest. Despite news that handset maker Nokia would buy the navigation software maker. The deal agreement sent implied volatility sharper lower and undermined any bullish positioning in the call options. For example, October calls at the 80 strike trading at 0.40 lost 85% of its value today. Shares declined 1.9% to $76.50.
EWH - iShares MSCI Hong Kong - shares jumped 2.3% today to rise to $21.52. Options activity was a robust 43,000 contracts equivalent to around one-half of current open interest on the shares. The December 18 and 20 calls have traded on volume of 20,000 contracts each on prices of 0.30 and 0.75. It could be that as shares have ratcheted higher, an investor has rolled up the strike to remain closer to the current share price. Shares have been on a tear over the last six weeks adding around one third as the Pacific Rim continues to show economic strength.
Andrew Wilkinson Rebecca Engmann Darst
Senior Market Analyst Equity Options Analyst
ibanalyst@interactivebrokers.com
