European benchmarks are in mixed territory at present writing, with the FTSE 100 up 0.30% to 6,520.20. The CAC 40 in Paris is down .16% at 5,690.23, while the DAX is up .09% to 7,953.81, thanks in large measure to Deutsche Bank’s 13% rise in Q3 profits, reported this morning. Deutsche Bank shares are leading the pack of DAX leaders today with a 12-point gain to EUR 95.91 as of this dispatch. The bank’s adroit management of sales in assets and tax credits cancelled out much of its exposure to hung loans from leveraged buyouts and lagging fixed income earnings in the wake of the late summer credit squeeze. The report gave ballast to European financials and sparked a run on Deutsche Bank’s October EUR 96 calls – fully 20% of today’s volume in Deutsche Bank options was seated at this strike, which was bought lustily at EUR 2.10 – a 200% gain in premium in a matter of four days. We’ll be interested to see the impact of the financials’ rally on the VDAX index, which measures volatility in German stocks. The index closed at a reading of 17.36 yesterday, having shown a slow upward trajectory since last Thursday’s close at 16.57.
Investors saw a banner performance from most Asia-Pacific benchmarks this morning. The Nikkei 225 gained .90% to close at 17,199.89. The Hang Seng pared gains from earlier in the week to close 2.55% lower at 27,749.94. China’s CSI 300 gained 2.8% to close at 5,580.81, while Singapore’s Straits Times Index gained 1% to close at 3,754.62.
Our futures arbitrage data is pointing to a gap lower for U.S. shares on the opening, with contracts on the S&P 500, Nasdaq 100 and Dow Jones Industrial Average all trading below fair value this morning.
Markets will take their cue from this morning’s ADP employment report, crude oil inventory numbers and ISM non-manufacturing numbers for September.
Recapping option news from the late Tuesday session, news that an investment consortium led by J.C. Flowers and including Bank of America and JP Morgan Chase would offer $50 per share for Sallie Mae (SLM) in combination with warrants for outstanding shares, sent the company’s fortunes up .34% to $50.07. As noted in the Wall Street Journal, these warrants – pending Sallie Mae’s business performance going forward – could be worth up to $10 per share, creating the impression that J.C. Flowers’ original $60-per-share offer (a price from which the buyers balked last week) is still nominally intact. Option traders put more than 132,000 Sallie Mae options in play, with calls and puts trading at near parity – but virtually no one staking bets on that elusive $60 mark. The October 50 strike appeared to be the watermark for Tuesday’s activity. The 30,000 lot-volume in the October 50 calls looks to have been generated by sellers, unloading for $2.40 positions that were bought at prices of $1.20-1.85 last week. Puts at the same strike in the October contract traded to buyers and sellers. We also noted heavy liquidity in the November 50 calls, which traded 13,600 times – open interest having tripled at this strike over the past week. Implied volatility has continued its decline, since topping out at 67% last Thursday, and now rests at 33%.
Shares in Hershey, the country’s biggest candy maker, were unsettled by news of the departure of CEO Richard Lenny, due to reported wrangling with the majority shareholding Hershey Trust over the company’s strategic direction. Implied volatility ticked up to 26% as a trader took the opportunity to enter a 9,000 position in the January 40/50 strangle. The position, which cost $1.20 to enter, supposes a break outside the range of the strike prices above $51.20 or below $38.80 in the wake of Lenny’s departure. Hershey’s share price has shown a mostly steady decline for the past 6 months since peaking at $56.75 in early April – the reigning 52-week high. The current share price is hovering just about $2 above the 52-week low set in August. Hershey’s shares were trading as high as the $60 mark in October 2005, but hasn’t touched those levels since.
Rebecca Engmann Darst
Equity options analyst/Financial Writer
