Today’s tickers: POT, GOOG, JOSB, AF, ITU, IGT
POT – Is Canadian potash, as some analysts are postulating today, “the new crude?” One day after shares in the Potash Corp. of Saskatchewan soared to record highs on a tripling in the price paid for the coveted crop nutrient by Chinese buyers, the company’s stock price fell back about 3% to $192.22. The development follows news breaking during the Asian session that China will hike export tariffs on most fertilizers in a bid to keep ample supplies for Chinese growers at the height of the crop season. Implied volatility on Potash shares soared more than 18% on the session as option traders are now pricing in 22% more wiggle room than they has already been charted in the stock’s past trading behavior. A trader’s market has emerged in the April 200 calls, with traders eagerly taking both sides of the bet as to whether Potash can pull off a close above $200 by Friday. Fresh and frisky two-way traffic is also observed at the May 220 strike, where the $6.00 price of the contract reflects a slightly better than 1-in-4 chance that Potash shares can breach the $220 mark over the next month.
GOOG – Google shares, meanwhile, are up .27% at $456.28 as the market treads water ahead of its richly anticipated numbers. A grasp of the level of price risk to Google shares is apparent from the implied volatility reading, which at more than 46% is conspicuously elevated above the 39% historic reading. April options are pricing in nearly a $30 move on back of the earnings after the bell.
JOSB – Is this a “sartorial straddle…” or just downside protection? Very interesting volume is going through in men’s haberdasher Jos. A Bank Clothiers, one week after reporting record profits for 2007 and beating street estimates for EPS. The stock has received mixed attention in the financial press of late, having declined earlier this week on inflation fears, and on concerns that it may face a build in inventories. On the other side, the company announced earlier today that its EBITDA is at a 9-year high. With shares down 2.5% at $24.87 today, a position involving 11,940 lots appears to have gone through on either side of the April 35 line. While we marveled at the possibility that this might be a long-volatility straddle, the only sensible explanation seems to be a sale of the April 35 calls for 10 cents to defray the purchase of in-the-money puts for $10.30 apiece. A similar, 4,000 lot position was observed at the July 35 line, with both sides trading to the middle of the market at a combined premium of $9.10.
AF – Shares in Astoria Financial, the greater Long Island-area savings and loan, dropped 11% to $24.24 today after reporting a surprise 19% drop in first-quarter profits owing to a higher rate of loan prepayments. Our market scanners flagged an unusual reaction in the options market in the form of a 17% rise in implied volatility on Astoria Financial options. Implied volatility usually comes off sharply following an earnings announcement – even a negative one. In this case, option traders may not feel that the effect of the numbers has been fully reflected in the share price. To that end, option traders are using option contracts to capture the movement they feel Astoria Financial shares still have to show before the expiration of the April contract on Friday. This has helped to propel option volume to more than 10 times the normal level, with the equivalent of more than a third of its open interest in play today. This has been largely concentrated at the April 25 call line, volume exceeding open interest and trading mostly to buyers at 10 cents apiece as traders availing themselves of a cheap bet on a recovery past the $25 line by Monday.
ITU – Brazilian banks extended their rally in U.S. trading, one day after policy makers came behind the market with a 50-bp hike in the benchmark Selic rank. Options in Banco Itau Holding Financeira, the country’s second-largest non-government bank, surged to 7 times the normal level, with today’s volume roundly centered in puts despite the 3.7% gain for shares to $26.19. Most of this has occurred at the out-of-the-money 20 strike, where the June 20 strike traded to the middle of the market for 30 cents within existing open interest, while puts at the same strike in the September contract were bought for 90 cents. Option traders hold twice as many put positions as calls in Banco Itau.
IGT – Has the one-armed bandit met its match? Shares in International Game Technology, the world’s largest maker of slot machines, dropped 5% to $36.12 after its Q2 earnings fell short of street estimates. The shortfall was attributed not just to a drought in gambling revenue but to a new business landscape for casino owners, who are waiting for regulatory approval for new slot machines and navigating new model designs in terms of potential returns. With implied volatility at 40% still coming in above the historic reading, option traders feel the share price still has room to move, sending option volume to nearly 5 times the normal level. Puts are trading twice as often as calls, with traders closing out positions in April 35 puts, and entering fresh new positions at the July 30 put line at 6 times the open interest.
Andrew Wilkinson and Rebecca Engmann Darst
ibanalyst@interactivebrokers.com
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