Today’s tickers: SHLD, AMD, PSS, LM, MLM, CSCO, YHOO
SHLD – Sears Holdings – An ugly showdown at the Sears Holdings annual meeting between the company’s hedge fund manager-cum-CEO Eddie Lampert and rival William Ackman, Sears’ fourth-largest shareholder, sent shares in the retailer 5% lower at $95.19. Ackman is reported to have blasted Lampert in an unusual public display, taking him to task for the company’s lackluster valuation and his own poor communication skills, later telling the Chicago Tribune that he had to take his beef to the company’s annual meeting because Lampert has refused to take his calls. Who’s next to make their move in this unusual corporate showdown – Erica Kane? Sensing the tensions roiling under the surface of this contentious company, the option market sent implied volatility 10% higher to 50.6% - indicating nearly 25% more price risk to Sears Holdings’ shares over the next 30 days than has been charted historically. Puts and calls are trading on comparable volume, with virtually all of today’s volume situated in the June contract in anticipation of its May 25 earnings release. Heavy volume was noted at the June 80 and 110 puts, and again at the 110 calls.
AMD – There’s no want of potential catalysts to explain the more than five-fold intraday increase in option trading volume in Advanced Micro Devices on our platform today, making it the single-biggest relative volume gainer as of the noon hour. An 11.5% gain for its shares to $7.28 comes two days before its annual shareholders’ meeting, one day after expanding its laundry list of antitrust grievances against arch-rival Intel, and hot on the heels of an industry report claiming a 3.8% increase in global chip sales during the first quarter of the year. What’s a little more surprising is the relative imperviousness of AMD’s implied volatility, which at 46% has barely budged on the news. A closer look at today’s active trading volume revealed calls outtrading puts by 4 to 1, a proportion that on the surface of things might imply real validation that the end of AMD’s share price tribulations is high. But while the July contract did indeed show a sizable overweight of calls bought at strikes 7, 8 and 9, we saw a huge, near 23,000-lot glut of volume – far outweighing the existing open interest - in January ’09 calls at the $7.50 strike, trading mostly to sellers for $1.30 today. Another 10,000 lots was reported in excess of open interest at the May 7.00 calls, again selling mostly to the bid at 35 cents. We wonder if this willingness among option traders to sell call premium freshly – be it against an underlying stock position or not - has to do with a closer reading of the legal briefs filed Monday in the ongoing Intel wrangle, as explored in yesterday’s online edition of PC World, which noted that AMD will have to more than double its share of the microprocessor market in the long term, just to survive, stating bleakly: “Fresh concerns about AMD’s long-term sustainability coupled with existing worries about the company’s fiscal health – weakened by the delayed release of its Quad-Core Opteron processor and mounting long-term debt – could lead CIO’s to consider computers based on Intel’s chips instead.”
PSS – Collective Brands - Shares in the Topeka-based parent of Payless ShoeSource tanked 16% to $10.32, a new 52-week low, after losing a $305 million federal court ruling that found the discount shoe franchise violated copyrighted designs owned by Adidas Group. While Collective Brands has vowed to pursue all avenues of appeal, implied volatility in its options rose more than 20% to 81.7%, suggesting particular vulnerability for its shares over the next month. The volume we observed early on in June 17.50 calls seems likely to be the closing purchase of existing short positions, as the value of these contracts has dwindled to practically naught. Elsewhere, option traders were all about 7.50 puts in the September and December contracts, where these positions were bought heavily. A 5,000-lot position in the January contract in 10 puts and 17.50 calls may be a strangle or collar to protect an underlying share position. Overall its options are trading at some 9 times the normal level.
LM – Legg Mason – Option traders took cold comfort in Legg Mason’s first-ever quarterly loss since its IPO, on news that the company was compelled to funnel $255 million into money-market funds heavily exposed to subprime-related debt. With shares already down 5.4% to $59.36, the 39.6% implied volatility reading on all Legg Mason options shows a continued elevation above the 34.8% historic reading. With options trading at 3.4 times the normal level, we’re seeing a brisk two-way traffic in June 65 calls, but heavy buying in deep-out-of-the-money January 40 puts at $1.50 apiece – traders buying freshly into this position despite the fact that option traders currently ascribe barely a 1% chance of the position landing profitably.
MLM - Martin Marietta Materials – In a reprise of the increasingly familiar refrain of high implied volatility – even post-earnings release – we find options in Martin Marietta, the country’s second-largest U.S. supplier of construction aggregates such as crushed stone, sand and gravel. The company has, predictably, been a collateral casualty of the homebuilding doldrums, and its 37% drop in Q1 earnings was attributed to the continued slowdown in groundbreaking. Despite the report, shares read 1.5% higher at $113.73 heading into the noon hour. Our scanners picked up a 7-fold increase in option trading volume occurring as implied volatility remains virtually unchanged from pre-report levels – the present 41% reading shows an 18% elevation above the historic reading. This translates into higher premiums as the cost for locking in prices on a stock with potential for greater-than-usual volatility increases. Two spots on the option calendar showed an unusual level of volume today, first the May 105 puts, and again at the June 110 calls, which traded to the middle of the market at $8.70. We’re not sure if this is long positioning in anticipation of Martin Marietta shares continuing to shrug off the construction slowdown and build upon May price levels above $110 – although the price of the position itself would require a test of the $120 level not seen since January - or traders selling those calls (an eminently risky strategy) to take advantage of unusually high premiums given the implied volatility reading. It should be noted that option traders hold twice as many call positions as puts in Martin Marietta.
CSCO – Cisco - After-the-bell numbers from the maker of networking hardware will be painstakingly sifted through for clues to the tech sector outlook. With shares down 1.3% at $25.93, Cisco’s front-month options have pared back price move expectations since Friday. Where the closest-to-the-money strikes were predicting as much as a 9% up-or-down move as of Friday, today’s options show only about a 6% likely move, and early market action showed many traders crowding into May 26 calls for 85 cents apiece (a 22% discount from yesterday’s levels) while relatively more puts at the May 25 strike sold. Put spreads may have been deployed at strikes 24 and 26 owing to comparable volumes at those strikes.
YHOO – Yahoo! – Today’s 5.3% gain for Yahoo shares to $25.83 seems hardly the plaudit for its tenacious refusal to succumb to Microsoft’s buyout overtures that the company’s management is keen to depict. The company has entered a new phase of the corporate potboiler, in which speculation has turned to whether activist hedge-fund shareholders may vote out the entire Yahoo board, file suit for the company’s failure to observe its fiduciary responsibility to investors, or even demand the head of Jerry Yang. All these factors contributed to sending implied volatility another 10% higher to the 60% mark this morning. While 3 times as many calls are trading as puts this morning, we note that most of the traffic is in May calls at strikes 25-30, all strikes with massive existing open interest, where volume has been two-way all the way.
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.
