Bulls have no jones for Jones New York
Today’s tickers: JNY, RIMM, KG, SHW, XLP, CFC
JNY – We continue to monitor option action in Jones Apparel Group, the women’s shoe and apparel group behind brands including Nine West and Jones New York. Following the successful sale of its Barney’s chain of department stores earlier this year, the company is executing plans to phase out lower-margin sportswear divisions and last week announced plans to shut down its Anne Klein line. None of this appears to be placating option traders, emboldened in today’s session to sell calls at the December 20 strike. The activity has sent trading volume to 21 times the daily average. This is the highest level of call volume registered for Jones in more than a year, but the fact that they’re being sold can hardly come as consolation to hopefully bulls. The action is occurring against the backdrop of a .71% gain for shares to $18.52. It is notable to see this level of short volume in calls – nearly 15,500 lots have traded at this strike today – without an attendant spike higher in implied volatility, but the 48.3% current reading is elevated by any standard. A look at overall open interest shows the number of open call positions dwarfing those of puts by a factor of 7 to 1.
RIMM – Blackberry maker RIM is showing an uncharacteristic 6.5% decline this morning to $114.03, after an analyst downgrade cited concerns of a seasonally slower winter for PDA/handheld sales in North America. Of the 134,000 options trading, some 10,700 lots have traded in the December 120 calls – some 66% of the open interest recorded in that strike prior to today. These contracts, currently fetching about $7.00 apiece, have depreciated some 27% today. Implied volatility on RIM options currently reads 78%.
KG – Foggy takeover chatter appeared to be informing much of the early session action in King Pharmaceuticals, leaving a dent in the implied volatility. Option traders’ anticipation of forward-looking turbulence in shares of the company, which makes prescription pain relievers including Avinza and Skelaxin, rose 30.6% on the session, and now reads 60.7%. Its options, meanwhile, are moving at 10 times the daily average. The 8,340 contracts in play today match up against 17% of the total open interest. The surge in implied volatility and call-side interest is some part consistent with the characteristics of a rumor-driven stock – especially the fresh buying we observed in December 12.50 calls, which are being snapped up at a quarter apiece. Interest in the 12.50 call strike extended to the January contract, where the same position can be acquired for $0.40 per contract today. However, we note that call traders have not sought exposure at strikes other than the 12.50 mark – noteworthy given that King has traded as high as $22.10 over the past year. Its stock price had depreciated some 25% in the two months leading up to its Q3 report earlier this month. And there’s virtually no move to sell put positions – also a hallmark of a stock basking in rumor momentum.
SHW – The maker of household paints and owner of the Benjamin Moore paint brand, Sherwin-Williams ticked our market scanners owing to a seven-fold rise in trading volume. Shares in the paint maker are trading 1.2% higher at $62.40. No catalyst for the sudden spike in volume is readily apparent, but the 6,600 lots trading in the January 60 puts represent fresh long positions, indicating a defensive posture on the part of investors expecting a return to the lows of early November.
XLP - Options in the Consumer Staples SPDR (XLP), whose components include defensive, consumer hard-times mainstays like Coca-Cola, Pepsi, Wal-Mart and Kraft Foods, have attracted 19 times the average interest today, as shares edge 0.17% lower at $29.10. The liquidity we observed in the December puts this morning appears fresh, and shows evidence of bear put spread activity between the 28 and 29 puts. With this strategy, a trader would buy the 29 puts at a price per contract of $0.40 while simultaneously writing puts at the 28 strike at a price of $0.15, starting the trade at a debit of $0.25 for the trade in anticipation of a very modest decline in the value of the ETF.
CFC – Mortgage lender Countrywide Financial, whose share price has been in the direct line of fire of any and every news tidbit on the state of credit conditions in this country, surged more than 18% this morning to $11.02. The move came after news that the White House is in talks with a number of top banks on a plan to freeze resets on adjustable-rate mortgages held by subprime borrowers in a bid to stave off foreclosures. Option traders responded with zeal, putting some 140,000 contracts in play. The volume bias of puts to calls in attributable in large part to heavy selling in January puts at the abysmal 7.50 strike. Liquidity in the December contract favored calls at the 10 and 12.50 strikes, which traded handily to buyers and sellers.
Andrew Wilkinson and Rebecca Engmann Darst
ibanalyst@interactivebrokers.com
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