Today’s tickers: FNM, DVA, BGP, GRMN, BHI
FNM – Executives at Fannie Mae, the country’s largest buyer and underwriter of home mortgages, found themselves in hot seat today, urged to defend their method of accounting credit losses in an investor conference call. Fannie Mae shares declined 10% yesterday after questions arose over the so-called “cure rate” on loans bought from mortgage bond trusts. Price action today shows the damage control bid did little to smooth ruffled investor feathers.
Implied volatility in Fannie Mae options gained nearly 20% to start the session as its shares lost 4.5% of their value to $41.14 today. With 53,000 options in play, we observed traders rush to buy November 40 puts on a volume twice the existing open interest, paying around $0.45 on an eleventh-hour bet that Fannie Mae shares will end the session at or below $39.55. The dour view extended into the December contract, where puts were bought at strikes of 35 and 40 in fresh positioning. A look at the overall open interest in Fannie Mae options shows 1.3 puts open for every call.
DVA – Davita – Shares in Davita, which operates kidney dialysis service centers in 41 states, are .75% higher this morning at $58.76. A look at the option action shows the 10,600 lots in play match up to nearly 30% of its existing open interest, and nearly 4 times the average daily volume. Davita’s 52-week high of $67.44 was set in late October, and its shares have come off some 13% since that time owing to a Q3 earnings miss and two analyst downgrades. In a statement to accompany its November 2 earnings report, the company conceded that it was entering a period of “unusual earnings uncertainty,” but a look at the options action would seem to suggest bullish price action expectation in January, with buying action appears to in force in the January calls, at strikes of 60 and 65. Added to this was risk reversal activity involving out-of-the-money strikes in April 50 puts and 70 calls.
BGP – Borders Group – Investors are throwing the proverbial book at retail bookseller Borders. Shares are down 2% at $12.13, ahead of Tuesday’s earnings report, and a look at the option distribution shows little expectation of happy ending. With about 7,600 lots in play, options are moving at 26 times the daily average, with what appear to be fresh long positions in the January and February puts at the 10 strike. Given today’s premiums, the breakeven on these contracts implies a move into single digit share price for Borders – breaking below an 8-year low. Borders shares are down 51% for the year to date, underperforming archrival Barnes and Noble by some 34%.
GRMN- Shares in digital mapmaker Garmin, the name behind some of the world’s best-selling GPS systems, are up more than 15% this morning to $96.98 – this after the company withdrew from a bidding war with rival TomTom to acquire that company’s Dutch peer TeleAtlas. Garmin announced that it has decided instead to extend an existing agreement with US-based company Navteq, the company recently bought out by mobile phone giant Nokia. Investors appeared relieved to see Garmin dodged a proverbial bullet in opting against pursuing Tele Atlas, which would have cost the company $3.4 billion and diluted its earnings until 2010. Option traders, meanwhile, responded by putting 86,000 lots in play, with buyers piling into the November 100 calls on a level exceeding prior open interest. With zero time value to toy with, the contracts were bought for around $0.15 apiece in a bid to capitalize on Garmin’s wave of good feeling. In the December contract, meanwhile, it appears that investors may be selling strangles in combinations between the 85 and 105 strikes in anticipation of return to a calmer trading range.
BHI – Baker Hughes Inc – Options in the world’s third-biggest oilfield services provider are trading at three and a half times the daily average as its shares slide 1.2% to $79.62. With nearly 20,000 option contracts trading this morning, we noted a 15,775-lot transaction go through in the January 65 puts. These traded to the middle of the market at $1.00 apiece – given current premiums, a buyer of this position is wagering on a 20% drop in Baker Hughes’ share price to $64, or within 3% of its 52-week low of $61.87.
Andrew Wilkinson and Rebecca Engmann Darst
ibanalyst@interactivebrokers.com
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