A poke in the eye from the French for Warren Buffett
Today’s tickers: CEG, RIMM, FCX, SLB, SNDK, MRVL, & JNPR
CEG – Constellation Energy – Whether today’s revisited bid for half of Baltimore-based Constellation has inspired investors to realize that bargains do indeed exist in the marketplace or not, it’s certainly a provocative move by France’s Electricite de France. It’s also a real eye-poker for Berkshire’s Warren Buffett, who wants to pay $4.7 billion to the company, while today’s offer for just half the business at $4.5 billion values Constellation at around $52 per share. Of course, that explains today’s 12.6% rally to $28.32 while investors mull the prospects of where the company’s allegiances will end up. Of course, the company agreed to the approach by MidAmerican Energy Holdings earlier this year. The fizz is leaving the shares, which earlier reached $30.17 and option implied volatility tells us that a bidding war may indeed ensue virtually doubling to 71% today. Investors paid premiums of 3.85 to scoop up calls at the 25 strike in December and 3.20 for January expiration calls at the 30 line.
RIMM – Research in Motion – Shares reversed earlier losses despite a sad downwards revision to third quarter earnings from Blackberry-maker, RIMM in which it reduced revenues, earnings and subscriber additions in a weakening economy. And just to kick the man while he’s down, the stock was taken off a leading analyst’s conviction list at a top-tier bank. Initially investors delivered a punishing 5% knockdown in the stock and loaded up on puts. However, shares have climbed back for a gain on the day and currently stand 1% higher at $37.70. There is news circulating that the company is trying to buy someone, but we don’t see this as a catalyst for a rally in the current environment. Implied volatility declined on the options by around 8% to 111% after yesterday’s negative news from competitor, Palm. The put-call ratio is finely balanced with call activity centered at the December 40 strike where 10,000 contracts have traded up to a premium of 2.84. The December 30 strike puts were bought earlier on volume of around 7,000 contracts while the volume at the 25 strike of 3,100 lots exceeds open bearish positions.
FCX – Freeport McMoRan – The commodity bust has led the world’s largest copper producer to announce a large cut back in production covering the next two years. Shares subsequently got hammered and are down by 20% at $17.55. Investors in the options market sold December expiration call options at the 20 and 25 strikes to take in premium or close stale positions while some bought for a dime buying rights at the 30 strike. Bearish positions were established in the February contract were puts at the 10 strike were bought on volume of more than 5,000 contracts, eclipsing existing positions of around 1,700 lots. At the 12.5 strike volume of 2,700 contracts was largely bought for a premium of 2.05 and again is likely to double current bear plays.
SLB – Schlumberger – The company noted a likely sharp retrenchment in capital spending activity in the oil fields, which sent shares hurtling 6.5% to $41.12. The option market reacted in a mixed fashion with healthy call volume seen in December where fresh positions were added at the 40 strike while the 45 and 50 lines also saw decent activity. In the 35 strike puts investors sought protection from further share price weakness as they bought 2,700 puts at a 1.40 premium. There was similar traffic at the 40 strike in both December and January puts.
SNDK – Sandisk – According to one unconfirmed source, Toshiba may revisit its plans to acquire Sandisk. That has investors all excited and shares have rallied 18.2% to $8.53 today. Unsurprisingly calls are in great demand at strikes between 8.0 and 15 in the soon-to-expire December contract along with more interest in the January calls as high as the 16 strike where investors are paying 30¢ for buying rights on the stock. Implied volatility is up 13% at 157%.
MRVL – Marvell Corp. – Shares rose 18% to $6.00 after a surprisingly strong earnings report with boosts to revenues and profits after a penny loss last time around. Option activity is relatively elevated and the picture somewhat murky. It appears an investor has sold 6,000 of the February 6.0 strike puts at 45¢ and bought the same number of puts in the May contract at a cost of 80¢. On the call side in both February and May contracts investors have sold the 5.0 strike and bought the 7.5 strike for an approximate net credit of 1.0 per contract. This would indicate an investor is unwilling to expect a share price rally beyond the upper strike and certainly not above a breakeven share price at $8.50 above which the investor increasingly loses money. Implied volatility caved on Marvell’s options coming in around one quarter to 73%.
JNPR – Juniper Networks – Similar shenanigans in options at Juniper today where shares were 2.7% higher at $16.68. Option investors appeared to favor long call positions at the 15 and 16 strikes while selling the same strike calls one month further out at the January expiration. In either case the net credit is around 55¢ per contract.
Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com
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