Today’s tickers: HD, RGNC, HUM, VIX, MER, CFC, YHOO, UA, AMT
HD – Rumors are circulating this afternoon that Warren Buffett’s Berkshire Hathaway company is keen on a stake in DIY empire Home Depot. The Buffett chatter appears to be the only driver behind a rush to buy calls in the November contract at the 35 strike. These were bought heavily today at premiums up 150% on the session. Of note here is the oddity that the Buffett rumors, if true, have failed to make an appreciable dent in Home Depot’s share price, which is flat this afternoon at $31.37, having been tamped down throughout much of the month of October since last trading at $35 in late September. Is the Buffett talk all blather?
RGNC – Shares in Regency Energy Partners, the midstream natural gas processor owned by General Electric, gained 1.2% today to $31.30, following news on Friday of the imminent retirement of CEO Jim Hunt, accompanied by a cut in year-end profit guidance. Fresh short strangle positioning in the December contract exceeded prior open interest in the ticker, sending options volume to 300 times the daily average. The position, which cost $0.75 to enter on today’s deflated premiums, is indicative of a trader that, despite the outlook for declining profits and the hunt for a Hunt successor, is looking for Regency shares to remain bound within the $30-35 price range, or within 10% of the standing 52-week high, into December.
HUM – Shares in managed health care provider Humana gave back early gains posted after it reported a near doubling in Q3 profits from a year ago, thanks in large measure to income from government-sponsored programs. Humana shares are currently trading 3.5% lower at $73. Calls at the November 80 strike have traded at more than twice the open interest today, primarily selling to the bid. Given that the calls are significantly out-of-the-money, we venture to suggest that this may be covered call selling against stocks already owned. Elsewhere traders were eager to buy the November 60 puts for 0.45 apiece.
VIX - With leading U.S. indexes trading flat-to-higher at the noon hour, we were surprised to see a near-2% jump in the volatility index, which tends to react inversely to the benchmarks. The index now shows a reading of 19.92, having breached the 20-mark around noontime, but a look at options action shows investors positioning for continued elevation in the fear index into the New Year. More than 10% of today’s option volume on the VIX was tied up in December 25 calls, which were scooped up for $1.10 apiece – a 12% discount from Friday. It appears that the January 25 calls may also have been bought, these trading to the middle of the market for $1.90, as the market factors in a better than one-in-three chance that the index will remain above 25 by January’s expiry.
MER – A look at the option action behind last week’s bete noire, Merrill Lynch, shows some traders willing to make a contrarian bet against downside volatility in early 2008. This morning’s headlines hold that the departure of embattled Merrill Lynch CEO Stan O’Neill is all but sealed – save the golden handshake – after last week’s disgraceful writedown and reports of an unsolicited deal overture to Wachovia. Shares are 2% higher at this dispatch at $67.48, with a 64,000-lot volume showing twice as many calls moving as puts. With varied premiums on both put and call sides, one trader apparently saw fit to take a leap on a solid recovery for mother Merrill come New Year. This was in evidence in the purchase of 4,000 lots in the January 85 calls, which were bought for $0.55. It’s important to note here that while $80 is the average share price for Merrill for the past six months, the share hasn’t actually traded at this level since late-July – pre-crunch fallout. A look at the delta on this call shows just a 10% chance of the bet landing in the money in January, but seems a clear wager on the part of some traders that after O’Neill’s dubious (and as yet unofficial) adieu, there’s nowhere for Merrill shares to go but up.
CFC – With shares down 2-plus% to $16.88 in early afternoon trading, shares in the nation’s top mortgage lender Countrywide Financial are giving back some of Friday’s extravagant post-earnings gains. Option traders are also tweaking their positions more circumspectly, with 77,500 lots in play showing a volume bias to the puts. Those November 20 calls that were so richly sought out by traders late last week have sold off heavily today as traders have looked to buy November 15 puts. Heavy volume in the December contract was seen in the 12.50 puts, which traded to the middle of the market at $0.80. Again, it’s hard to detect a bullish or bearish order flow based on today’s traffic – buyers may have been closing out positions opened last Thursday when the December 12.50 put was worth a whopping $2.25 before taking a pitfall to $0.70 on Friday.
YHOO – Yahoo! - Yahoo! options remain extraordinarily liquid this afternoon, with more than 430,000 options moving against a near-5% dip for its share price to $31.97. We could find little in the way of news catalysts to explain the spectacular retracement, apart from reports that the company’s sales division has been hit with the resignation of a couple high-placed executives. Market option remains largely divided as to whether Yahoo! can meet its Q4 cost-control targets without resorting to layoffs. With call premiums sharply lower on the declining share price, today’s volume favors the calls by a factor of 5.6. Heaviest volume is concentrated in the November calls, where the 32.50 and particularly the 35 calls have traded vigorously to buyers and sellers.
UA – Under Armour Inc – Shares in athletic wear maker Under Armour are flat at $59.50 this afternoon, one day before it’s due to the report Q3 earnings before the bell. Last week, the company was in the analyst spotlight on speculation that its profit outlook compares unfavorably with the likes of Nike and Adidas. Today’s market finds UA options moving at more than 4 times the average rate. Strangle activity in the November contract between strikes 55 and 65 appears to be in play, though we cannot ascertain whether this position is being bought or sold, while traders appear to have taken advantage of higher call-side premiums to sell December calls at the out-of-the-money 70 strike.
AMT – American Tower Corp – Options in this producer of telecommunications broadcast towers are trading at 15 times the average rate today, against a 2.4% gain for shares to $46.38 – a new 52-week high. Earlier this month news emerged that American Tower was actively exploring possible tower acquisition targets in India. Much of today’s volume appears tied up in strangle activity involving 20,000 lots in the January contract between the 40 and 50 strikes, although the transaction is too new to ascertain whether the position was bought or sold. The combined premium of $1.75 is put toward an anticipation of volatile breaks above or below the strike prices in the case of a bought strangle, or set aside as a trade credit by a strangle seller who expects range bound price activity in January. The strangle and its implications for volatility is an interesting trading course to take for a company currently trading near all-time highs.
Andrew Wilkinson and Rebecca Engmann Darst
ibanalyst@interactivebrokers.com
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