Today’s tickers: YHOO, F, NOK, AKS, PGR, SMS, ALU
YHOO – Deafening silence following the passing of a weekend deadline for response to Microsoft’s takeover offer kept implied volatility in Yahoo! options at a 71% elevation above the historic reading. So while some market observers believe the failure of a Microsoft deal to materialize through “civil” channels could buy Yahoo shares a little more time at current levels even for a number of months, the option market sees added and immediate risk to its share price over the next 30 days. Following on from a big day in speculative positioning (Friday’s option volume was the highest for Yahoo since the Microsoft “bear hug” was originally made public on February 1), today’s market sees heavy volume at both the May 22.50 put strike and the 30 call strike. A couple of scenarios could be at work here – traders may be positioning long volatility at each of those strikes, as the combined $1.26 premium would require very little sweetener to Microsoft’s original bid, and protect investors against a collapse in the original deal…or there may be reverse collars in play.
F – The other big stake-building news to shake the options market this morning was the news out of Ford. A near-10% gain in the automaker’s share price followed news of a stake purchase by Kirk Kerkorian’s Tracinda Corp, eliciting a 12% decline in implied volatility to 47.8% and what would appear to be a net shedding of premium on the part of option traders. May volume shows 2-way traffic in calls at the 8 and 9 strikes – due largely to the closeout of positions opened late last week – open interest at that latter strike swelled from 302 contracts to nearly 16,000 last Thursday. Calls at the June 8 strike are selling for 77¢, as are puts at the same strike, on comparable volume, suggesting little impetus on the part of option traders to jockey for further upside in the automaker’s shares.
NOK – Shares in the world’s largest maker of traditional cellular phones, Helsinki-based Nokia, rose 3% to $29.54 after the company debuted three new mid-priced phone models. The news appears to have sent option trading volume to a two-week high as traders wagering on the future price direction of the mobile phone giant appeared willing to sell June puts at the 29 and 30 strikes, and buy calls at the same strikes, possibly in anticipation of summertime tailwinds. The jury is otherwise largely split on the outlook for its share price, which has declined by more than 23% for the year to date. A look at the number of open call to open put positions shows a largely even split between the two.
AKS – AK Steel – A 4% decline in shares of AK Steel to $64.53 has options volume equivalent to nearly 20% of its open interest in play, with calls outmoving puts by nearly 14 to 1. It would appear that traders are using the pullback in share price today to seek exposure to renewed upside heading into the summer months, given the keen buying interest we observed in June calls at strikes as high as 75 and 80. Either strike would put AK Steel well at a premium to its standing 52-week high of $69.59.
PGR – Progressive Corp – An increase in option trading volume to more than 20 times the normal level accompanied negligible share price movement, with a .43% gain to $18.72. Earlier today the company urged shareholders to vote down a $16.60 per-share offer that would fend off a hostile takeover by TRC Capital, and while the muted upside for Progressive shares suggests a market mildly impressed by its resistant chutzpah, the option volume appears heavily cloistered in puts. Buyers of June puts were noted at strikes of 17.50 and 20, putting a pre-emptive kibosh on the likelihood of a higher offer coming their way in these dust bowl days for M&A.
SMS – Sims Group Ltd. – Shares in Sims Group Limited, the newly-listed antipodean scrap metal recycler that’s been on the receiving end of lots of positive buzz thanks to bullish steel prices, rose a modest .67% to $32.95 this morning. With options trading at 42 times the normal level on no apparent news catalyst, today’s volume is the highest in its two-month lifespan as a US-traded company. The volume is occurring in the December contract at the 30 put strike and the 35 call strike – contracts which, if traded on the long side together (these have gone to the middle of the market, making it hard to establish directionality with certainty), would constitute a volatility-bullish strangle, generating profit for the buyer with a break above $41.62 or below $23.38. At $6.62, a long strangle at those strikes costs 20% of the current share price – and this on a company that has traded in a $23.70-$34.40 range since its initial listing.
ALU - Alcatel-Lucent – Shares in Alcatel-Lucent, the French wireless operator that has lost half its value over the past 52 weeks, are trading flat at $6.83 ahead of Wednesday’s earnings announcement. The heightened sense of anticipation pre-EPS is apparent given the disparity between implied and historic volatilities in Alcatel-Lucent options – at more than 43% implied, option traders are pricing in about 9% more risk yet to be realized in its share price. A possible sign that the downside may soon have run its course showed up in June 7.50 calls, which traded to the middle of the market for a mere 20¢ apiece
Andrew Wilkinson and Rebecca Engmann Darst
ibanalyst@interactivebrokers.com
Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
