Today’s tickers: RAI, ILMN, MDT, YHOO, MSFT, GOOG, XLF, ETFC, MOT, LINE, UST
RAI – “Big tobacco” continues to be a compelling theme for option traders. Shares in the country’s second-biggest tobacco company, Reynolds America (holding company of R.J. Reynolds Tobacco, whose brand portfolio includes Camel, Kool and American Spirit cigarettes) are up 1.3% today to $64.06. With the company due to report earnings one week from today, it appears that a trader may have taken the opportunity to roll a sizable position in out-of-the-money $70 calls from the February contract to March. The move was sufficient to send option volume in Reynolds America to 10 times the normal level, as the 10,000-lot position measures up to nearly a fifth of Reynolds total open interest now vested in that upside strike. A break of $70 would place Reynolds shares within 2% of its 52-week high. Like market peer UST, Reynolds America is currently trading at 15 times its earnings.
UST –UST Corp – Following news of Altria’s spinoff of its overseas division – requiring new and more aggressive focus on the growing U.S. tobacco-chewing population - the implications for current tobacco market dominator UST has been a recurring theme in our analysis this week. UST options are once again trading on elevated volumes, trading at 3.5 times the normal level. Speculative rumors that Altria might even make a play to buy the company could be driving the action today, given the fresh 10% spike in implied volatility in UST options to 32.3%. Moreover, where much of the option action in UST this week has been characterized by put buying, today we’re seeing traders seek exposure to upside with fresh buying in February 55 and 60 calls. UST shares are currently trading 3.5% higher at $58.80.
ILMN – With Q4 earnings due out Monday after the bell, it’s no surprise to see a heightened level of option trading interest in Illumina. The San Diego-based company develops genetic testing products for genotyping, DNA methylation studies and gene expression profiling. Today’s 7.5% advance in share price to $68.47 may owe some of its gusto to renewed speculation of a GE buyout of the company. A look at the option activity shows some curious upside positioning in the March contract which doesn’t suggest an earnings-correlated move. Calls at the $80 strike traded some 2,500 times for $1.20 – a more than 200% increase in the price of this premium overnight – conjecturing on a $6 break above its standing 52-week high. Interest in Illumina calls has driven overall option volume to nearly 7 times the normal level, and the generally bullish tinge ahead of earnings sent implied volatility higher some 13% to 63%. This still implies less price risk to its shares than the 66% degree of fluctuation that it has shown over the past year.
MDT – Shares in Medtronic advanced 2.5% this afternoon to $47.69 on news that the FDA has approved the sale of its drug-covered cardiac stent, Endeavor, for sale on the US market. Endeavor is the first approved drug in this new generation of stents. The share price action sent implied volatility in Medtronic options up 17% to more than 30%, a sign that option traders are factoring in about 26% more price risk to its shares over the next month than has been documented in the past year. Option traders were quick to put more than 20,500 options in play, with calls outmoving puts by nearly 9 to 1. Nowhere was the zeal for upside more apparent than in the February 50 calls, which were bought heavily on volume more than triple the open interest. Buying pressure at this strike extended into the March 50 contract. Given the momentousness of today’s FDA ruling, we were surprised to see little buying interest in higher strikes, with the February 52.50 calls trading mostly to sellers. Medtronic tested the $58 level as recently as October.
YHOO – Yahoo! – Shares in Yahoo advanced 47% to $28.28 on news of Microsoft’s takeover bid. As has been confirmed in the market consensus this morning, the bid, which offers more than a 60% premium to Yahoo’s closing price yesterday, will be hard for the ailing search engine to fend off. Today’s news confirmed the market’s thesis of recent weeks that the prospect of takeover has been the only surefire way to generate share price upside, call buying momentum, and genuine enthusiasm in Yahoo’s prospects. No amount of strategic or reorganizational rhetoric, gladhanding at industry events, or product rollouts has done the trick. The thesis has borne out in option trading over the past several weeks, and we’re seeing the fruitful upside of it today, post-bid. With overall volume of 746,500 contracts trading three times as often to calls as puts, the immediate reaction in Yahoo! options was a wave of profit taking in July calls at strikes of 25 and 32.50. Premiums on these contracts surged 200-300%. Call-buying was observed at the 30 strike in April and again in the front-month contract, where volume quickly surged to 2 times the open interest.
MSFT –Microsoft - Shares in the Yahoo! suitor declined 6.7% to $30.40, with 325,000 options trading this afternoon. There has been a good deal of chatter in the aftermath of the Microsoft bid that news of the acquisition might in fact be bullish for Microsoft’s share price, and evidence of that point of view was apparent in the heavy selling we observed earlier today in February 30 puts and fresh buying in February calls at the 31 and 32.50 strikes. As with Yahoo!, the July contract has been a point of particular interest for investors, with straddle activity at the 32.50 line – a position which costs a combined premium of $4.80 today.
GOOG – It’s hard not to correlate the timing of Microsoft’s dazzlingly audacious takeover bid with Google’s one-penny earnings miss after the bell yesterday, an earnings shocker that sent shares in the notoriously volatile stock sharply lower. Tasting blood in the water from its adversary in the online search space, Microsoft couldn’t have picked a better moment to pounce. Google shares are currently down 7.6% at $521.17, with about 181,000 options trading more often to calls than to puts. All’s not lost for Google’s share price prospects, however, as we can see that with premiums at these call strikes down as much as 80%, fresh volume (that is, new trades on volume exceeding prior open interest) is being observed in February calls at strikes of 500, 510, 520, 540, 540 and 550. All this has contributed to a general overweight of call activity in Google, outpacing puts by a factor of 1.6.
XLF – Financial Select Sector SPDR – Shares in the financial sector ETF are .69% higher at $29.34 this afternoon, and with 324,000 options trading this afternoon the trend is skewed to puts by a factor of 1.3. Heavy volume is going down in the February puts, where more than a quarter of today’s total volume is concentrated in out-of-the-money puts between strikes 25 and 28. February calls attracted buyers at the 29 strike, where 22,000 lots traded. Higher call premiums suggest pressure to buy into upside exposure at these strikes, despite the slight decline in underlying share price today.
ETFC - Option activity in E*Trade piqued our attention owing to a more than 12% spike in implied volatility to 99%. Shares reversed gains early in the session and now stand 1% lower at $4.92. With three times as many calls moving as puts, we noted heavy traffic in February 5 calls on volume of more than 12,000 lots – open interest at this strike tripled this week, in step with share price gains for E*Trade’s battered stock, on news of insider stock buying by its CEO and directors. Insider buying of this nature makes it unlikely that E*Trade shares are moving on rumors of an imminent takeover. Interest in calls at the 5 and 6 strikes extended into the March and April contracts today, as traders look to jockey for upside exposure to E*Trade shares further out. The ticker has been mentioned as a possible takeover target in a number of news write ups following the Microsoft/Yahoo announcement speculating on a new wave of U.S.-based M&A activity.
MOT – Shares in cell phone maker Motorola surged 9% this afternoon to $12.52 after CEO Greg Brown hinted that the company was exploring a possible spinoff of its loss-yielding handset division. With more than 65,500 options trading before noon, Motorola is one of the most active option families on our platform. A gauge of the mood in Motorola options shows many traders seizing the moment offered by today’s share price gains to take profit in existing call positions – virtually all of the open interest in March 11 calls sold off today as the value of the position doubled in value. We also observed a rush to take profit in calls at the 12 and 13 strikes, where premiums swelled in value by 300-400%. The action suggests traders opting to take premium now rather than anticipate the kind of continued near-term price gains for Motorola that would be afforded by an on-deck buyer for its mobile devices unit. Still, call positions in Motorola outnumber puts by a factor of 1.5.
LINE – Shares in oil and natural gas explorer Linn Energy declined 4% today to $20.77, within a dollar of its 52-week low and further cementing a 16% slump in the value of its shares for the year to date. Long, fresh volatility positioning in the April 20/22.50 strangle suggest traders positioning for further turbulence into the spring. With little else in the news domain to inform the timing of the move, our best guess is that this volatility play is tied to Linn’s earnings announcement on March 28 – coinciding with the April contract. In this case, the trader pays a $2.80 combined premium for a position that profits if Linn shares drop below $17.20 or break above $25.30.
Andrew Wilkinson and Rebecca Engmann Darst
ibanalyst@interactivebrokers.com
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