Today’s tickers: GOOG, TRMP, MER, WM, MIR, CBH, ZZ, RIMM
GOOG – Google shares have rallied 2.7% today on news of an analyst upgrade, which set the tech bellwether’s price target at $700 by year’s end on the strength of a trebling in U.S. YouTube users and a boost in print and radio ad revenues. The news sent nearly 68,000 options in play this afternoon, more than 10% of its open interest. But while the analyst community is having a heyday at price bets for Google by year’s end, option traders are bullish in the near term, but more reticent about staking claims further out. While today’s option volume is mostly tied up in call buying, this is overwhelming limited to the October contract at strikes between 600 and 630.
TRMP – Shares in Trump Entertainment Resorts (TRMP) got a 17.5% windfall today, trading at $8.21 on news that the Cordish Co., of Maryland, may make a play for one of the jewels in the Trump casino crown. Option volume picked up to 11 times the daily average this afternoon as implied volatility spiked nearly 13% on the news. The level of anticipated price fluctuation in Trump shares now stands at 95.7%. Much of today’s volume appears seated in the November 7.50 puts, which sold for 0.75 today – 10% of the strike price – having halved in value in the space of a week.
MIR - Meanwhile, it does appear that options traders are making a power play on Mirant (MIR). The global company, whose U.S. activities primarily concern the production and sale of electricity and power capacity to utilities, municipal systems coops, generators and the like, mainly in the north and Midwest parts of the U.S., is seeing erratic liquidity in its options today, with more than 70,000 contracts trading. This is more than 7 times the daily average Deal chatter appears to be driving the action this afternoon, as evidenced by the uptick in implied volatility, which having remained static at around 31% for the past few weeks, spiked up to 35% this morning.
What looked to us like profit-taking in existing positions in the December contract earlier this morning has shifted to out-and-out fresh call buying in the October and November contracts, at strikes of 42.50 and 45.00
Mirant shares have spent much of 2007 on a slow climb from the $22 price cellar in January, peaking at $49 in May. Shares have since come off somewhat, pricing in at $42.97 today, a near-3% rise on the session.
When it comes to major financial companies these days, it seems the more egregious the sin, the more exultant the forgiveness. And so it goes today, amid Washington Mutual’s reported 75% decline in quarterly profits and Merrill Lynch’s dire warning – both shares are rallying and the market’s sense of “fight or flight,” as gauged by the VIX index, has pulled back an astonishing 10% to stand at 16.59. An article in today’s Financial Times called the phenomenon “cathartic,” evidence of a mass coming-clean about balance sheet blemishes and moving forward in prosperity. Others might call it “jabberwocky.” The sense of collective kumbaya has also extended to options trading.
MER - Today’s admission from Merrill Lynch (MER) that it will stomach a $5 billion writedown, resulting in its first quarterly loss in 6 years and issued a terse warning for the rest of the year, resulted in a 2.9% gain for its shares to $76.99. Implied volatility came off some 7% as the company came clean and exultant options traders bought into the rush, sending more than 35,600 contracts circulating. Much of this was located at either side of the October 75 line, where calls are trading for $3.30 – up nearly a quarter percent on the day.
WM - Washington Mutual (WM), meanwhile, also managed to pull off a 2.7% gain for its shares to $36.26 despite reporting a 75% decline in third-quarter profits. It wasn’t so long ago that some factions of the financial community were expecting less subprime-related roiling from Washington Mutual than its notorious counterpart, Countrywide, owing to its comparatively larger deposit base and lack of dependence on short-term debt markets. Not so, it seems. With premiums favoring the put side today, we observed brisk buying and selling in the October 35 puts, against a volume of some 1,300 lots in the October 37.50 calls.
CBH – Commerce Bancorp – Shares gained 1.9% to stand at $40.23, penetrating the 52-week high days after news of its acquisition by Toronto Dominion Bank. Options traders put more than 16,000 contracts in motion in the first market hour, but it doesn’t look as though traders are positioning for the kind of upside breaks past $40 that many of us thought would follow the TD big earlier this week. Most of today’s volume is localized in the January 40 calls, which sold mostly to the bid this morning at a price of $1.70, in apparently fresh positioning.
ZZ– Sealy Corp – Options in the world’s largest bedding maker are having a fitful time of things today, after Q3 earnings missed street estimates. Options are trading at more than 6 times the average volume today against an 8% drop in share prices to $13.55, breaking below a prior 52-week low. Today’s 2,970 active contracts match more than a third of the total open interest, a proportion which already favors the bearish puts by a factor of 1.6. Today’s volume appears seated in December puts at the 12.50 strike, trading to buyers and the middle of the market, with premiums elevated some 150% on the session.
RIMM - Research in Motion – Earnings in-line with street expectations and an upward adjustment to year-end earnings and profit guidance gave traders just the flourish needed to put more than 438,000 contracts in circulation. Shares are up 13% and are already look to be angling for the $115 mark as 1.5 calls trade for every put. Heaviest volume is observed at the October 100 line, where 20,000 lots traded to the calls while 14,000 were logged to puts. A glut of volume is also apparent at the 10 strike, while we were interested to see declining call premiums on strikes of 115 and above. Implied volatility has come off sharply today, down 35.6% post-earnings, to 48.3%. The pullback in implied volatility is apparent in the price of RIMM’s October 110 straddle – yesterday this position was selling for $17.30 – today it’s half that amount.
Andrew Wilkinson and Rebecca Engmann Darst
ibanalyst@interactivebrokers.com
Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
